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REFLECTIONS
TABLE OF CONTENTS

President’s Message

First Vice President’s Message

2014 Bank Highlights

Reflections on Monetary Policy

2014 Board of Directors

Economic Advisory Council

Community Depository Institutions Advisory Council

Management Committee

Additional Bank Officers

Statement of Auditor Independence

Financial Statements

This annual report
covers my last year as
president and CEO of
the Federal Reserve
CHARLES I. PLOSSER, PRESIDENT AND CEO
Bank of Philadelphia.
I am writing this letter
in advance of my retirement, effective March 1, 2015. It has been an
honor to have led such a wonderful
organization for more than eight
years and to have worked with so
many talented and dedicated people
here in Philadelphia and around the
Federal Reserve System.

PRESIDENT’S MESSAGE

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

I came to Philadelphia in 2006 after
more than three decades in academia, where much of my research
and teaching centered on the
subjects of macroeconomics, monetary theory, and finance. Serving
as president of the Philadelphia Fed
has given me a rare opportunity to
combine three roles: first, to lead
an extraordinary organization of
dedicated professionals committed
to public service; second, to serve as
a monetary policymaker, to put into
practice what I had studied for all my

career; and third, to continue a lifelong role as an educator, through my
speeches and writings over the past
eight years to help people understand the economy, monetary policy,
and the role of the Fed.

I would like this report to
serve not only as a reflection
of the last full year of my
service but also as a way
for me to step back and
offer some thoughts on the
importance of this institution
and its role as part of the
nation’s decentralized
central bank.

The theme of this 2014 Annual Report is Reflections because I would
like this report to serve not only as a
reflection of the last full year of my
service but also as a way for me to
step back and offer some thoughts
on the importance of this institution
and its role as part of the nation’s
decentralized central bank.
My essay will offer “Reflections on
Monetary Policy” to review a set
of principles that I have shared in
my speeches and writings during
my term. I believe these principles
would improve the framework for
making monetary policy decisions.
I explain the benefits of a central
bank that commits to a set of clearly
articulated objectives that can be
feasibly achieved by monetary policy, that conducts monetary policy
in a systematic or rule-like manner,
that communicates its policies and
actions to the public in a clear and
transparent way, and that protects
its independence, in its governance
and its practice, by maintaining a distinct separation of monetary policy
from fiscal policy.
The annual report also includes a
message from First Vice President
Blake Prichard about our Centennial
year, which marked the first century
of service since the opening day of
our Bank on November 16, 1914. His
letter is followed by Bank Highlights,
which presents our achievements
during 2014, including Centennial

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

observances and our biennial Reinventing Older Communities conference held in May 2014.
Our long record of success would
not have been possible without the
community, banking, and business
leaders who have served on the
Bank’s board of directors and advisory councils. The nine individuals
who serve on our board of directors
provide a traditional oversight role
of directors everywhere, as well as
contributing their sage counsel on
the economy. I especially want to
acknowledge Ted Peters, former
chairman and CEO of the Bryn Mawr
Trust, who completed six years of
service as a Class A director, elected
by the member banks in the District.
I also want to thank Rosemary
Turner for her service as a Class B
director, elected by the member
banks to represent the community.
Soon after her term began in 2013,
Rosemary was promoted by UPS as
head of its North California District,
based in Oakland, CA, which necessitated her resignation late in 2014.
To fill these two seats, two new
directors were elected: Jon Evans,
president and CEO of Atlantic
Community Bankers Bank of Camp
Hill, PA, as a Class A director, and
Carol J. Johnson, president and COO
of AlliedBarton Security Services
of Conshohocken, PA, as a Class B
director. Both joined the board as
of January 2015. Patrick T. Harker,
president of the University of
Delaware, was reelected to a threeyear term as a Class B director.
I thank Chairman James E. Nevels,
founder and chairman of the
Swarthmore Group, who completed

his first year as chairman, and
Michael J. Angelakis, vice chairman
and CFO of Comcast Corp., who
completed his first year as deputy
chairman. As the year ended,
Jim and Michael also took on the
important task of leading the
nonbanking directors through
the process of selecting the next
president of the Bank.
In addition to the directors, I must
acknowledge the service of those
citizens on our advisory councils. In
2014, we welcomed four executives
to the Bank’s Economic Advisory Council (EAC): Madeline Bell,
president and COO, the Children’s
Hospital of Philadelphia; Varsovia
Fernandez, president and CEO,
Greater Philadelphia Hispanic Chamber of Commerce; Maria Rodale,
chairman and CEO, Rodale, Inc.; and
Lynn M. Utter, president and COO,
Knoll Office, a unit of Knoll, Inc.
The Bank also welcomed five new
representatives to the Community
Depository Institutions Advisory
Council (CDIAC), which includes
representatives from commercial
banks, thrift institutions, and credit
unions in the Third District. In 2014,
this council added Marcie Barber,
president and CEO of Juniata Valley
Financial Corporation and the Juniata
Valley Bank, Mifflintown, PA; Anthony
Biondi, CEO and director of MNB
Corporation and Merchants Bank
of Bangor; Ed Dietzler, president
of The Bank of Princeton; Angela
Snyder, vice chair and CEO of Fulton
Bank of New Jersey, Mount Laurel,
NJ; and Mark Turner, president and
CEO of WSFS Financial Corporation
and WSFS Bank, Wilmington, DE. In
addition, Dennis D. Cirucci, president,

CEO, and director of Alliance Bancorp
Inc. and Alliance Bank, completed
his service in 2014 as our Bank’s
representative on the Federal
Reserve Board’s CDIAC.
I also thank Scott V. Fainor, president and CEO of National Penn
Bancshares, Inc. and National Penn
Bank, for being our District’s representative to the Federal Advisory
Council, which meets quarterly with
the Board of Governors in Washington, D.C.
Finally, I offer my sincere thanks to
the talented and dedicated officers
and employees at the Philadelphia
Fed. The 100-year history of our
Bank is a story of the people who
have contributed to its success
through their commitment to public
service. Among the senior staff,
I want to acknowledge Michael
Dotsey, who was promoted to
senior vice president and director of
research in May. He succeeds Loretta
Mester, who became president
and CEO of the Federal Reserve
Bank of Cleveland. I also want to
recognize Richard A. Sheaffer, who
retired at the end of 2014 as senior
vice president and general auditor.
Michelle Scipione was named vice
president and general auditor as of
January 1, 2015.
In closing, I would like to express my
gratitude for having had the pleasure
of national service in a truly esteemed
institution under the leadership of
two outstanding chairs. Ben Bernanke
brought an academic openness to the
conduct of the Federal Open Market
Committee (FOMC), encouraging the
exchange of ideas among participants,
which has led us through challenging

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

times and has helped the Fed move
toward greater transparency.
Chair Janet Yellen has continued that
academic openness and will be a
strong and dedicated leader as the
FOMC charts a policy course toward
normalization. I’m honored to have
had the opportunity to work with
Chair Yellen as a colleague when she
was president of the San Francisco
Fed, as Vice Chair when we worked
together on the communications
subcommittee, and as she has led the
Fed as its Chair during this past year.
I have been truly honored to share
the FOMC table with these leaders
and so many others from throughout
the Federal Reserve System as we
have strived to make this institution
more transparent, to more clearly
define its principles, including a
specific inflation target, and to help
guide monetary policy in the best
interests of the American people and
the American economy.
It has been an honor to lead the
Philadelphia Fed as it completed its
first 100 years of service, and I am
confident that the people who serve
here and around the System will be
here through the years to serve the
best interest of the American people
for the century ahead.

Sincerely,

Charles I. Plosser
President and CEO
February 27, 2015

FIRST VICE PRESIDENT’S MESSAGE
D. Blake Prichard, First Vice President and COO

When the Federal Reserve Bank of
Philadelphia first opened its doors
on November 16, 1914, the Bank
and its employees embarked on a
mission to promote stable economic
growth, to supervise for a safer and
more sound banking system, and to
create an efficient payments system.
Operations began in rented office
space at 406-408 Chestnut Street in
Philadelphia with a board of directors, four officers, and 24 staff members to serve 758 member banks.
For the century that followed, the
Philadelphia Fed and its counterpart
Reserve Banks stayed true to the
mission. We have been resilient,
adaptive to change, attentive to the
unique characteristics of industries
within our respective boundaries,
and responsive to the needs of
our stakeholders. We also have
evolved with the needs of a modern
economy. Today, performance of
the nation’s payment system is no
longer defined by time and distance.
Manual check processing transitioned to automation, and this has
made way for increased automated
payments and easy payments via
personal computers, mobile devices,
and emerging new technologies.
Our advanced communications and
technology have evolved accordingly
to support most Federal Reserve
functions efficiently from anywhere
in the nation.
As we entered 2015, we bid farewell
to our president, Charles I. Plosser,
thanking him for his eight-and-a-

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

half years of service. He has added
immeasurably to our economic
knowledge, especially in understanding business cycles and monetary
policy choices. He served during a
global financial crisis and the Great
Recession that followed, shepherded
a steady economic recovery, implemented Dodd-Frank regulations,
presided during the centennial of
the Federal Reserve, and witnessed
a historic succession of Federal
Reserve Board Chairs. But he may be
best remembered for his thoughtful
and sometimes outspoken views on
what the Fed should and should not
be doing to conduct monetary policy. In so doing, he exemplified the
intent of the System’s founders who
wanted to ensure that the clearest
voices on the Federal Open Market
Committee were those that represented the real economy.
Our best hope for the next 100 years
is to continue our focus on leadership, engagement, investments,
and performance. Our leadership
strengths will inform monetary
policy, influence banking supervision
for improved oversight in achieving
safety and soundness in our financial
institutions, and promote innovative
payment systems that serve the
needs of consumers, governments,
and businesses. Our engagement
with industry, academia, and
community leaders will serve to
inform, educate, and strengthen our
capabilities and focus on what lies
ahead. Our investments in people
and technology will develop the talent to meet any challenge and to do

so with the best tools available. And
our performance will make us an
essential part of the Federal Reserve
System, an indispensable partner
with Third District entities, and a top
contributor in fulfilling the mission
of the Federal Reserve System.
As you will see in our Bank Highlights
on the pages that follow, we have
many distinct examples of how we
have continued to build on a century
of service to the public. I hope that
what we have learned during our
first 100 years has helped us build
a solid foundation for the next 100
years and beyond. As we commemorated our first century of operations,
we marveled at the amazing changes
that have occurred and can only
imagine the change that is before us
in our second century of service to
America. We’re ready!

D. Blake Prichard
First Vice President and
Chief Operating Officer
February 27, 2015

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

Our engagement with
industry, academia, and
community leaders will
serve to inform, educate,
and strengthen our
capabilities and focus on
what lies ahead.

2014 BANK HIGHLIGHTS
FEDERAL RESERVE BANK OF PHILADELPHIA

BRIDGING GROWTH AND OPPORTUNITY

Edward Rendell and panelist Jeffrey Brown

The Community Development Studies and Education Department
hosted the Bank’s biennial Reinventing Older Communities (ROC)
conference, titled Bridging Growth & Opportunity. The conference
highlighted how communities can promote economic growth
in ways that can benefit all residents. It included six plenary
sessions, 20 concurrent sessions, and four neighborhood tours
and activities with a record number 465 community developers,
advocates, and planners, as well as bankers, government and
business leaders, researchers, and foundation representatives
from more than 25 states and the District of Columbia. Leading
experts in the area of inclusive economic growth were among
the speakers, who included Edward Rendell, former governor
of Pennsylvania; M. Night Shyamalan, filmmaker and author of
I Got Schooled; Raj Chetty, Harvard University economist; Leigh
Gallagher, assistant managing editor of Fortune; Mark Zandi,
chief economist at Moody’s Analytics; and Jeremy Nowak,
national community development expert and former chair of the
Philadelphia Fed’s board of directors.
The biennial Reinventing Older Communities conference is an
example of how the Bank promotes research-informed practice
and practice-informed research. The conference fosters an
exchange of innovative strategies and emerging approaches to
ensure all people and communities, particularly those of lowand moderate-income, have opportunities to benefit from
economic growth.

M. Night Shyamalan

Leigh Gallagher

Conference cosponsors included the Federal Reserve Banks of
Boston, Chicago, Cleveland, New York, Richmond, and St. Louis;
the Annie E. Casey Foundation; the Penn Institute for Urban
Research; the Fund for Our Economic Future; and the Federal
Home Loan Bank of Pittsburgh.

Jeremy Nowak

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

STREAMLINING CASH OPERATIONS
The Federal Reserve Bank of Philadelphia was one of nine
cash offices in the Reserve System that participated in
Evolving Operations field tests. These tests evaluated six
business process changes that improve the efficiency and
operational flexibility of Cash Operations while continuing to
provide effective controls. Evolving Operations will continue
to suggest operational improvements to keep pace with
the changing business environment and to improve the
efficiency of the cash supply chain.

RESEARCH DEPARTMENT TRACKS KEY INSIGHTS
In September, the Bank released the Nonmanufacturing
Business Outlook Survey (NBOS), a monthly survey of
nonmanufacturing firms. It complements the Manufacturing Business Outlook Survey (MBOS). The MBOS is
one of the Federal Reserve’s oldest regional surveys, first
launched in 1968. Survey participants from the Third
District provide data on the direction of change in their
overall business activity and in the various measures of
activity at their plants. Building upon the success of the
MBOS, our Regional Economics team introduced the
NBOS, which surveys nonmanufacturing firms about
current and future overall business activity. The survey
has been conducted monthly since March 2011 and
has built enough data in this time series to take greater
prominence in the economic outlook.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

TRAINING FOR ALL AGES
Nearly 100 students and professors from 11 colleges and universities in the Third District attended the Bank’s fourth annual College Seminar series in April. The curriculum included portions of The Federal Reserve and You video series, followed
by a hands-on session that simulated the Fed’s open market operations to demonstrate how the Fed adjusts short-term
interest rates. The college audience also heard an economic outlook, an update on monetary policy, and participated in a
Q&A session.
In July, more than 30 K–12 teachers from the Third District took
advantage of their summer break
to participate in the Bank’s annual
five-day Keys to Financial Success
teacher-training program. The
Bank’s economic educators provided sessions that instructed educators in the best way to teach the
course to their own students. In addition, 17 teachers enrolled in the
annual five-day Making Sense of
Money and Banking teacher-training course, which is designed to
help educators integrate money
and banking concepts into their
classroom lessons.
The Keys to Financial Success attracted more than 30 teachers from the Third District in 2014.

UPDATES ON LEGACY
TREASURY DIRECT

MAKING PAYMENTS SAFER
The Payment Cards Center (PCC) staff worked with a
team of researchers as part of the Federal Reserve
System payment system improvement initiatives. As the
team analyzed the U.S. payment security landscape,
the PCC staff — with its expertise in payments security
and the industrial organization of card-based payment
systems — made significant contributions to the reports
that identified security concerns as well as recommendations to the Financial Services Policy Committee for
improving the security of U.S. payment systems.

After nearly three decades of operating the
Legacy Treasury Direct (LTD) on behalf of the
U.S. Treasury’s Bureau of the Fiscal Service,
Bank staff led the effort to decommission the
application. Major initiatives for 2014 included developing communications for investors,
providing guidance to the Fiscal Service’s
information technology staff, supporting the
transfer of the LTD print and mail function
developing data files to support the replacement holdings system that the Fiscal Service
developed, and organizing and scheduling
closure procedures.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

COMMUNITY OUTREACH
Throughout 2014, the Bank’s PhillyFedCARES
team organized several initiatives in which Bank
employees volunteered their time and skills to
local schools and organizations.
More than 30 volunteers rolled up their sleeves
at the Andrew Jackson Elementary School in
South Philadelphia in honor of Martin Luther
King Jr. Day to help paint, clean closets and
gardens, work in the library, and perform general
maintenance. PhillyFedCARES also collected donations of school supplies and winter accessories
for students.
In March, PhillyFedCARES sponsored an event at
the Gen. George A. McCall Elementary School in
Philadelphia. Bank employees read books by Dr.
Seuss and other stories to students in grades K–3
as part of the National Education Association’s
Read Across America Day. The PhillyFedCARES
team also volunteered at the Philabundance
Hunger Relief Center, sorting and packing food
that was distributed through the Philabundance
programs as well as a network of nearly 500 food
kitchens, shelters, and facilities.

Bank volunteers read to students as part of the National Education
Association’s Read Across America Day; from top: Priscilla Lynch,
Deborah Finley, and Blake Prichard.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

STARTING OFF ON THE RIGHT FOOT
The Bank welcomed eight Cristo Rey Philadelphia High School students as part of the 2014
work-study program to extend outreach efforts
to majority-minority and inner-city high schools.
The eight interns worked in the Bank’s Human
Resources, Financial Management Services, and
Information Technology Services departments.
Cristo Rey partners with local organizations,
businesses, and educators to create an innovative environment that blends academics with
professional work experience.
Eight interns from the Cristo Rey Philadelphia High School participated in a workstudy program at the Bank.

THE VALUE OF
HOMEOWNERSHIP
COUNSELING

KEEPING UP WITH STANDARDS IN FINANCIAL
REGULATIONS, MORTGAGES, AND MORE

The results of a five-year effort by the Federal Reserve Bank of Philadelphia to track the
effectiveness of homeownership counseling
were published in “The Effectiveness of
Pre-Purchase Homeownership Counseling
and Financial Management Skills,” a comprehensive report that discusses the long-term
and short-term benefits of counseling and
followed the creditworthiness of study participants over time.
The study, which began in 2007, investigated
the effectiveness of pre-purchase homeownership counseling over a five-year period
using an experimental design with both
a control and treatment group. For study
participants, the report concludes that even
a two-hour pre-purchase homeownership
workshop and one-on-one pre-purchase
counseling benefited those who later bought
homes, and the counseling even improved
the financial creditworthiness of those who
did not become homeowners.

The Bank’s Supervision, Regulation & Credit Department hosted a
conference on Enhancing Prudential Standards in Financial Regulations, cosponsored with the Wharton Financial Institutions Center and
the Journal of Financial Services Research. Among the speakers were
Franklin Allen, the Nippon Life professor of finance and professor of
economics at the Wharton School of the University of Pennsylvania;
George Kaufman, cochair of the Shadow Financial Regulatory Committee and the John F. Smith Professor of Finance and Economics at
Loyola University Chicago; and Sandra Lawson, managing director of
Goldman Sachs. Attendees in the fields of economics and supervision
and regulation discussed prudential standards for bank capital and
stress testing, issues in mortgage and housing finance, and the issue of
financial institutions being “too big to fail.”
In another conference, the Bank’s Community Development Studies
and Education Department, along with the Urban Affairs Coalition
Foreclosure Prevention Task Force and Philadelphia’s Residential Mortgage Foreclosure Diversion Program, organized an event that highlighted the new rules that apply to bank and nonbank servicers of home
mortgage loans. More than 100 servicing directors and senior staff
from local financial institutions, attorneys specializing in foreclosure
prevention, and housing counselors turned out to review the recent
home mortgage servicing rules that went into effect in 2014.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

A TRIBUTE TO 100 YEARS OF SERVICE
On November 16, 2014, the Bank invited its
current and past employees and families to an
open house to commemorate the Bank’s first
day of business on November 16, 1914. Former
Philly Fed Presidents Edward Boehne and Anthony
Santomero, along with President Charles Plosser,
offered insights into the Bank’s history and reflections on the distinctive events during the times in
which they served. After the presentation, a panel
discussion examined the history of the three-pillared functions of the Bank: monetary policy,
payments systems, and supervision and regulation. Panelists Rick Lang, former executive vice
president and one-time director of research, who
worked for the Bank from 1984 to 2010, discussed
the Bank’s role in monetary policy; Bill Stone, the
longest-serving first vice president (1987–2010),
who worked for the Bank from 1971 to 2010,
spoke on the history of payments systems at the
Bank; and Connie Wallgren, current vice president
and chief examination officer in the Supervision,
Regulation & Credit Department, explained the
nuances of supervision and regulation. The City
of Philadelphia presented a proclamation to the
Bank in recognition of its 100-year anniversary
and a century of dedicated service.
Anthony Santomero, Charles Plosser, and Edward Boehne

Charles Plosser and Philadelphia Deputy
Mayor Alan Greenberger

Connie Wallgren, Rick Lang, and Blake Prichard

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

GLOBAL IMPACT
The Office of Diversity and Inclusion (D&I) and the Talent
Management (TM) Division of Human Resources hosted a
forum titled Integrating Diversity and Inclusion with Talent
Management to Create Sustainable Business Impact. More
than 70 D&I and TM practitioners from companies and
organizations from across the Third District and the Federal
Reserve System listened to the keynote address by Stephen
Frost, head of D&I for KPMG in London and author of The
Inclusion Imperative: How Real Inclusion Creates Better
Business and Builds Better Societies.
From left to right: Anilu Vazquez-Ubarri, Steve Hart, Stephen Frost,
Karen Vaughn, Kelley F. Cornish, and Mary Ann Hood

A CENTENNIAL PORTRAIT

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

IMPROVING THE TREASURY’S PAYMENT SYSTEMS
The Bank recently launched the
Post Payment System (PPS) that
will modernize and integrate many
previous U.S. Treasury systems.
The new system includes advanced
functionality to manage all Treasury-disbursed payments, adds additional fraud protection for these
payments, and provides the capa-

bility for improved data analytics.
After completing a pilot program,
the Bank installed its initial PPS
Release 1.0 on time and within budget, establishing the foundation for
the overall system. In 2014, more
than eight billion Treasury payment
records were converted from legacy
systems in this first phase.

When completed in 2018, the PPS
will replace the legacy systems,
boost the efficiency and effectiveness of Treasury payment processing, and provide enhanced analytical
capabilities.

In 1919, the Federal Reserve Bank
of Philadelphia gathered all of its
employees for a group photo at a
reception honoring the Bank’s five-year
anniversary. In the spirit of that historic
photograph, today’s Bank employees
were organized into multiple group
portraits to create three gigantic outlines
of the numerals in the figure 100. The
finished portrait, after working a little
digital magic, pays tribute to the Bank’s
100-year anniversary.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

REFLECTIONS

The past eight
years have been an
extraordinary period
in this nation’s
economic history,
perhaps the most
challenging since
the Great Depression. I came to lead
the Federal Reserve
Bank of Philadelphia in 2006, looking
forward to the opportunity to serve
the American public after more than
three decades in academic study,
where much of my research and
teaching centered on the subjects
of macroeconomics, finance, and
monetary policy.

ON MONETARY POLICY
BY CHARLES I. PLOSSER*

In my view, the monetary policy
framework is most effective when
the central bank:
•

commits to a set of clearly
articulated objectives that can
be feasibly achieved by monetary policy;

•

conducts monetary policy in a
systematic or rule-like manner;

•

communicates its policies and
actions to the public in a clear
and transparent way; and

•

protects its independence, in its
governance and its practice, by
maintaining a distinct separation
of monetary policy from fiscal
policy.

When I accepted my position here in
Philadelphia, I did not expect to face
a global financial crisis, an ensuing
recession, and a slow, steady recovery. Through it all, though, I can truly
say the people who have worked
alongside me here in Philadelphia
and around the Federal Reserve
System have strengthened my belief
in this remarkable institution.

These four principles are interrelated,
and, as you will see, communication
is a key ingredient for a sound policy
framework. During my time in office,
I have had the privilege of witnessing
progress in each of these dimensions.
Yet, I have described the process as a
journey, not a destination.

I would like to take this opportunity
to reflect on the past eight years and
describe how a set of principles of
sound central banking have guided
my thinking on monetary policy in
these turbulent times.

While we have made strides over
the past several decades, I also
recognize that the journey has taken
us into unchartered territory in
recent years. Extraordinary actions
by the Fed in response to the Great

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

Recession have presented unique
communications challenges, which
have made clarity more difficult.
Yet, I believe we have made progress
nonetheless.

THE JOURNEY THUS FAR
Just consider how far we have come.
At one time, it was taken for granted
that the central bank was supposed
to be secretive and mysterious. The
guiding principle was simple: The
less said about monetary policy, the
better. Indeed, it was not until 1994
that the Federal Open Market Committee (FOMC) began to announce
policy changes made at its meetings.
Before then, the markets were left to
infer the policy action from the Fed’s
behavior in the market.1 Since then,
the FOMC has issued statements at
each meeting, which include a vote
tally, along with the views of the
dissenters. The FOMC now expedites

the release of the minutes, publishing them three weeks after each
meeting. It also reports economic
projections of Committee participants four times a year, including
information about the appropriate path of policy that underlie
the forecasts. These meetings are
followed by press conferences with
the chair of the FOMC. In 2012, the
FOMC issued a statement clarifying
our longer-run goals and strategy,
including an explicit 2 percent target
for inflation.
A number of these initiatives,
including the statement of longerrun goals and objectives and the
improvements in the Summary of
Economic Projections were based on
the recommendations of a subcommittee on communications led by
then-Vice Chair Janet Yellen, which
included President Charles Evans
of Chicago, former Governor Sarah

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

Bloom Raskin, and myself. Serving
on this subcommittee and working
with these colleagues to find a way
for the FOMC to agree to a 2 percent
inflation target after more than a
decade of debate was one of the
highlights of my term in office.
In 2014, Chair Yellen asked Vice
Chair Stanley Fischer to lead a new
subcommittee on communications
— with Governor Jerome Powell,
President John Williams of San
Francisco, and President Loretta
Mester of Cleveland. As I said, it is a
journey, and I am pleased to see that
others will continue to seek ways
to improve communications after I
leave.

CLEARLY ARTICULATING
OBJECTIVES
Let’s consider how communications
support each of the four principles

of sound central banking, beginning
with clearly articulating the objectives of monetary policy. But before
doing so, it is useful to spell out
exactly what the FOMC is supposed
to do. The Federal Reserve Act calls
on monetary policy to “maintain
long run growth of the monetary
and credit aggregates commensurate with the economy’s long run
potential to increase production, so
as to promote effectively the goals
of maximum employment, stable
prices, and moderate long-term
interest rates.” Since moderate longterm interest rates generally result
when prices are stable, many have
interpreted these goals as being a
dual mandate to promote employment and price stability.
However, most economists are
dubious of the ability of monetary
policy to predictably control employment in the short run, and there is
a strong consensus that monetary
policy cannot determine employment in the long run. As the FOMC
noted in its statement on longer-run
goals adopted in 2012, the maximum level of employment is largely
determined by nonmonetary factors,
such as changing demographics,
taxes, and productivity, which affect
the structure and dynamics of the
labor market.
The recognition that monetary policy has a limited ability to affect employment as reflected in the 2012
statement has led me to, at times,
be skeptical of some of the FOMC’s
extraordinary efforts to remedy so
many aspects of the labor market’s
challenges. On several occasions,
I have noted that the benefits of
such efforts are not likely to outweigh the costs.

16
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

In my view, excessive focus on shortrun control of employment weakens
the credibility and effectiveness of
the Fed in achieving its price stability
objective. We learned this lesson
most dramatically during the 1970s
when, despite the extensive efforts
to reduce unemployment, the Fed
essentially failed, and the nation
experienced a prolonged period of
high unemployment and high inflation. The economy paid the price in
the form of a deep recession as the
Fed sought to bring down inflation
and restore the credibility of its commitment to price stability.
When establishing longer-term goals
and objectives for any organization,
and particularly those that serve the
public, it is important that the goals
be achievable. Assigning unachievable goals to organizations is a recipe
for failure. For the Fed, it could
mean a loss of public confidence. I
fear that the public has come to expect too much from its central bank
and too much from monetary policy
in particular. We need to heed the
words of Nobel Prize winner Milton
Friedman. In his 1967 presidential
address to the American Economic
Association, he said, “we are in danger of assigning to monetary policy
a larger role than it can perform, in
danger of asking it to accomplish
tasks that it cannot achieve, and as
a result, in danger of preventing it
from making the contribution that it
is capable of making.”2
In my view, the “dual mandate” has
contributed to a view that monetary
policy can accomplish far more than
it is, perhaps, capable of achieving. Even though the FOMC’s 2012
statement of objectives acknowledged that it is inappropriate to set

a fixed goal for employment and that
maximum employment is influenced
by many nonmonetary factors, the
FOMC’s policy statements in recent
years have increasingly given the
impression that the FOMC wants
to achieve an employment goal as
quickly as possible through aggressive monetary accommodation.
I believe that assigning multiple
objectives for the central bank opens
the door to highly discretionary
policies, which can be justified by
shifting the focus or rationale for
action from goal to goal. That is why
I have argued that Congress should
redefine the Fed’s monetary policy
goals to focus solely, or at least primarily, on price stability. I base this
on two facts: Monetary policy has a
very limited ability to influence real
variables, such as employment. And,
in a regime with fiat currency, only
the central bank can ensure price
stability. Indeed, it is the one goal
that the central bank can achieve
over the longer run.
Setting clear, achievable objectives
is the first part of the framework.
Asking policymakers to pursue those
objectives in a systematic, rule-like
approach is the second key principle.

THE BENEFITS OF SYSTEMATIC
MONETARY POLICY
So, what do I mean by a systematic
approach to policy? Quite simply, I
mean conducting policy in a more
rule-like manner. You often hear Fed
officials say that policy decisions are
“data dependent” and, indeed, they
are. This means that future policy
actions are conditional on how the
economic data unfold. We may not
know what the future holds or what

future policy decisions will be, but
we can choose to make those decisions in a systematic way based on
the incoming economic data. This
principle has
led me to advocate a more
“rule-like”
approach to
policymaking.3

‘In my view, excessive focus on
short-run control of employment
weakens the credibility and
effectiveness of the Fed in
achieving its price stability
objective.’

Of course, the
alternative to
rule-like policy
is discretionary policy, in
which policymakers are
free to choose
whatever action seems appropriate
or convenient at the time. Rules
act as restrictions on policymakers’
choices — limiting the degree of
discretion. But this is not a bad
thing; rather, it can result in better
economic outcomes in the long run.
Dating as far back as 1936, Henry Simons discussed how rule-like behavior is preferable to pure discretion.4
More recently, Finn Kydland and Ed
Prescott in their Nobel Prize-winning work showed that a credible
commitment by policymakers to
behave in a systematic rule-like
manner leads to better outcomes
than discretion by reducing policy
uncertainty.5 Since then, numerous
papers using a variety of models
have investigated the benefits of
rule-like behavior in monetary policy
and found that there are indeed
significant benefits.
One of the reasons that rules work
better than discretion is that they
are transparent and therefore allow
for simpler and more effective
communication of policy decisions.

17
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

Moreover, a large body of research
over the past 40 years has emphasized the important role that
expectations play in determining
economic outcomes. That means
more effective communication of
the decision-making process leads to
more accurate expectations. When
policy is set systematically, the public
and financial market participants can
form more accurate expectations
about policy. Policy is then less of a
source of instability or uncertainty.
This allows households and businesses to more accurately form
expectations and thus make better
decisions. As a result, systematic policy promotes a more stable, predictable, and efficient economy.
The appropriate way to make policy
systematic, or rule-like, is
to base policy decisions on
economic conditions. That
is, policymakers should describe the reaction function
that determines how the
current and future policy
rate will be set depending
on economic data.

‘Monetary policy
should be data
dependent, not date
dependent.’

However, on several occasions, I have noted that a
reaction function does not
mean a timetable or a threshold for
action. Monetary policy should be
data dependent, not date dependent. In my last vote as a member
of the FOMC in December 2014, I
dissented, in part because I believe
the language of the statement was
still trying to communicate policy in
terms of time. Whether the Committee states that it will be “patient”
or that it will wait a “considerable
time,” the language continued to
stress the passage of time as a key

18
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

determinant of policy rather than
making clear that policy will depend
on the data. Describing policy in
terms of time could also risk limiting
the Committee’s flexibility to respond to the data if we continue to
see an improving economy. I raised
similar objections when the FOMC
used time-dependent language to
communicate when it might eventually raise rates with a series of
moving calendar dates.
The use of data as a policy determinant must recognize that policymakers are no more certain about future
economic conditions than anyone
else is. Thus, the future path of policy will always be highly uncertain.
However, a reaction function should
explain how the policy rate will be
determined in the future as a function of economic conditions.
I have also noted that a reaction
function does not need to be mechanical. The science of monetary
policy has not reached the point
where we can specify a single optimal rule for setting policy and turn
decision-making over to a computer.
Judgment is still required.
The principle of systematic policy
has also influenced my perspective
on other central bank policy, including the programs for managing the
lender-of-last-resort role and the programs for large-scale asset purchases.
While these two aspects of central
banking are different, the approach
to policymaking ought to be the same
— that is, systematic, consistent,
transparent, and largely predictable.
The best guide to a systematic lender of last resort policy dates back
to Walter Bagehot’s simple rule of

lending freely to solvent banks at a
penalty rate against good collateral.
Yet, early in the financial crisis, the
Fed took extraordinary actions to
ensure financial stability that have
gone far beyond this concept. Some
of these actions supported markets
that were severely impaired; others
supported the ongoing survival of
institutions deemed too big to fail.
The actions in those couple of years
came so quickly that it is probably
not surprising that policy reactions
appeared, at times, erratic, rather
than systematic.

INCREASING TRANSPARENCY
As I mentioned at the outset, communication has been the subject of
considerable discussion in recent
years, particularly as monetary policy
ventured into unconventional policy.
Since the nominal federal funds rate
cannot go below zero, the FOMC has
used alternative or unconventional
policy tools, such as the large-scale
asset purchase program, in an effort
to provide further accommodation
to support the recovery. We also
had to figure out how and what
to communicate about these new
tools. The asset purchase program
has had many dimensions, such as
the overall volume of purchases, the
pace of purchases, the kind of assets
targeted for purchase, and the
criteria for starting and stopping the
purchases. Policymakers have tried
to fine-tune the program along each
dimension, so it is not surprising that
communication is very complicated
and challenging.
The task was further complicated
because one of the unconventional
measures employed by the FOMC
was forward guidance, which is a

central banker’s term for communications about the future path of
policy. One way to think of forward
guidance is that it is just another
step toward increased transparency and effective communication of
monetary policy. However, another
rationale for forward guidance is that
it is a way of increasing accommodation in a period when the policy rate
is at or near the zero lower bound.
In this approach, it can be desirable
to indicate that future policy rates
will be kept “lower for longer” than
might otherwise be the case. Such
a commitment would tend to raise
inflation expectations and lower
long-term nominal rates, thereby
inducing households and businesses
to spend more today.
However, I believe this approach
asks more of forward guidance than
just articulating a reaction function.
It requires policymakers to directly
influence and manage the public’s
beliefs about the future policy path
in ways that are different from how
they may have behaved in the past.
This approach to forward guidance
can backfire if the policy is misunderstood.6 For example, if the public
hears that the policy rate will be
lower for longer, it may interpret
this news as policymakers saying
that they expect the economy to be
weaker for longer. If the message
is interpreted in that way, then the
forward guidance will not succeed
and may even weaken current
spending. It is also difficult to pull off
this approach effectively because it
requires the public to believe policymakers will commit to a behavior
different from how they have acted
in the past. Managing expectations
is even more challenging when
policymakers have not committed to

19
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

a reaction function for normal times.
How can policymakers credibly
commit to deviate from something
they have never committed to in the
first place?
I believe we should think of forward
guidance as part of a systematic
approach to decision-making and not
as an independent policy tool that
attempts to bend expectations. As
monetary policy becomes normalized,
we have the opportunity to enhance
the public’s understanding that forward guidance is an integrated part of
a systematic approach to policy.
So, what additional steps can we
take to increase transparency? I believe that the FOMC could improve
communication and transparency by
publishing a more comprehensive
monetary policy report on a regular
basis, perhaps quarterly.7
At the end of December 2014, the
Philadelphia Fed issued an example
of what a portion of such a discussion might look like in a monetary
policy report. We used a set of policy
rules to benchmark the current
stance and path of policy and discussed the implications.8
The report showed that the federal
funds rate is no longer constrained
by the zero lower bound under a
number of these rules. In fact, the
rules indicate that maintaining the
federal funds rate at the zero lower
bound is unusually accommodative
by historical standards. The benchmarks suggest that as the economy
transitions to full employment and
moves closer to its long-run inflation
target, we should begin to gradually
reduce accommodation by raising
the funds rate target. Delaying liftoff

20
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

runs the risk of requiring more aggressive future monetary policy than
would otherwise be needed.
However, if the Committee felt it was
desirable to further delay the initiation of interest rate increases, such a
report would provide the opportunity, indeed the obligation, for a thorough and thoughtful discussion about
why discretionary deviations from the
guideposts were appropriate.
Thus, publishing a monetary policy
report with an assessment of the
likely near-term path of policy rates,
in conjunction with an economic
forecast, would be a useful exercise
and enhance communications. It
would also provide added discipline
for policymakers to stick to a systematic, rule-like approach. And it would
force policymakers to think more
deeply and systematically about
policy. Communication about that
path, in turn, should give the public
a much deeper understanding of
the analytical approach that guides
monetary policy.
While I am discussing transparency, I
also want to touch on another misconception. Some commentators express
the view that dissent causes dissonance and therefore confuses the
communications. In fact, letting the
public know about our debates and
differing views is more transparent
than hiding behind false consensus.
Monetary policymaking is conducted
by committee, and divergent views
can and often do exist. While this can
be clumsy at times, such governance
mechanisms have great strength in
preventing institutions from lapsing
into groupthink by ensuring that various views are heard in an environ-

ment that promotes better decisions
and outcomes. And they help to
preserve the central bank’s independence and accountability.
Open dialogue and diversity of views
lead to better policy decisions and
are the primary means by which new
ideas are gradually incorporated into
our monetary policy framework.
Thus, I believe diversity of thought is
a sign of thoughtful progress. I have
often quoted the famous American
journalist Walter Lippmann, who
said, “Where all men think alike, no
one thinks very much.” I think it is
healthy for the American public to
know that we debate some of the
same issues that those outside the
Fed debate. Hiding such debate behind a unanimous vote does nothing
to promote true transparency.

PRESERVING INDEPENDENCE
Finally, I believe that the fundamental American concept of a decentralized central bank has great merit, in
part, because it helps to preserve
the independence and maintain
the public trust in the institution.
Independence is essential if a central
bank is to play its fundamental role
in preserving the purchasing power
of a fiat currency. History is replete
with examples of governments
using the power to print money as
a substitute for making tough fiscal
choices, and the results are almost
always disastrous.
Central bank independence is a significant tenet of sound central banking and leads to better economic
outcomes. But independence must
be accompanied by accountability.
And accountability is more easily
achieved when there is transparen-

cy. The public can best hold a central
bank accountable when its goals are
clearly stated and achievable.
Broad, ill-defined goals, on the
other hand, reduce accountability
and invite discretionary policies
that can undermine the public trust
and thus jeopardize independence.
This is one reason why I have been
concerned about credit allocation
initiatives by the Fed that treated
some creditors more favorably than
others in bailouts and that sought
to provide special support to the
housing sector through its purchases
of mortgage-backed securities.
The decisions to acquire mortgage-backed assets, I believe,
strayed into credit allocation that,

‘I believe that the FOMC could
improve communication and
transparency by publishing a more
comprehensive monetary policy report
on a regular basis, perhaps quarterly.’
in my view, should be the purview
of fiscal authorities and not the
central bank. In hindsight, a basic
problem was that this approach
offered no systematic view as to how
and where the Fed would intervene
— we lacked a well-communicated
systematic approach. By pushing
these boundaries, the Fed puts its
independence at risk.
In 2009, I advocated that we establish a new accord between the U.S.

21
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

Treasury and the Federal Reserve,
similar to the Treasury-Fed Accord of
1951 that freed the Fed from keeping
long-term interest rates artificially
low. The new accord would help
ensure that, when the U.S. Treasury
requests the Fed to undertake emergency actions that require the acquisition of private or non-Treasury securities, the Treasury would exchange
such assets for Treasury assets. A new
accord would return control of the
Fed’s all-Treasuries balance sheet to
the Fed so that it can conduct independent monetary policy.

‘Finally, I believe that the fundamental
American concept of a decentralized
central bank has great merit, in
part, because it helps to preserve the
independence and maintain the public
trust in the institution.’
CONCLUSION
To summarize, my time as president of the Federal Reserve Bank
of Philadelphia has been guided by
these four principles. I have become
even more convinced of the value of
clear, achievable goals, pursued in a
systematic way. Because systematic
policy is easily communicated to the
public, it will improve the transparency and predictability of monetary
policy, which reduces policy surprises.
Equally important in my view is that
greater clarity about policymak-

22
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

ers’ reaction function strengthens
accountability. Thus, systematic
policy, communicated transparently, strengthens accountability and
serves to preserve the central bank’s
independence.
The FOMC’s recent moves to publish
guidelines on its longer-run goals
and policy strategy and the policy
assumptions that underlie FOMC
projections have been great strides
toward applying these principles.
Yet, more can be done.
As we normalize policy, I believe
we should follow these principles.
The Fed should ensure that it has
clearly articulated objectives that
can be achieved by monetary policy,
with price stability as the primary
objective.
I believe the FOMC should continue
to work toward increasing the public
understanding of how policy will
react systematically to changes in
economic conditions. Furthermore,
the FOMC should move forward to
describe a reaction function and
then communicate our actions and
decisions in terms of this reaction
function. A detailed monetary policy
report could be a useful vehicle for
such enhanced communication.
It has been a privilege to serve our
nation’s independent, decentralized
central bank. I believe that continued focus on these principles would
make our nation’s central bank a
stronger institution for the American
people and its economy.

END NOTES
* The views expressed here are my own and
not necessarily those of the Federal Reserve
System or the FOMC.
See the Federal Reserve Bank of
Philadelphia, “Timeline to Transparency,”
www.philadelphiafed.org/about-the-fed/
transparency/ (accessed October 9, 2014).

See Milton Friedman, “The Role of
Monetary Policy,” American Economic
Review, 58:1 (March 1968), pp. 1–17.

See Charles I. Plosser, “The Benefits of
Systematic Monetary Policy,” a speech given
to the National Association for Business
Economics, Washington Economic Policy
Conference, Washington, D.C. (March 3,
2008).

Henry C. Simons, “Rules Versus Authorities in
Monetary Policy,” Journal of Political Economy,
44:1 (February 1936).

Finn E. Kydland and Edward C. Prescott,
“Rules Rather Than Discretion: The
Inconsistency of Optimal Plans,” Journal
of Political Economy, 85 (June 1977), pp.
473–491.

See Charles I. Plosser, “Forward Guidance,”
speech to the Stanford Institute for Economic
Policy Research’s (SIEPR) Associates Meeting,
February 12, 2013, Stanford, CA.

23
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

See Charles I. Plosser, “Systematic
Monetary Policy and Communication,”
his remarks to the Economic Club of New
York, New York, NY, June 24, 2014; and
Charles I. Plosser, “Monetary Rules: Theory
and Practice,” his remarks to the Hoover
Institution, Stanford, CA, May 30, 2014.

See Michael Dotsey, Charles I. Plosser, and
Keith Sill, “Monetary Policy Report: Using
Rules for Benchmarking,” December 2014,
available at http://www.philadelphiafed.
org/research-and-data/publications/
special-reports/2014/1231-using-rules-forbenchmarking.pdf.

2014

CHAIRMAN
James E. Nevels (a, d)
Founder and Chairman
The Swarthmore Group
Philadelphia, PA

DEPUTY CHAIRMAN
Michael J. Angelakis (a, c, d)
Vice Chairman and CFO
Comcast Corporation
Philadelphia, PA

BOARD OF DIRECTORS
FEDERAL RESERVE BANK OF PHILADELPHIA

Left to right: Patrick T. Harker, David R. Hunsicker, and James E. Nevels

24
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

BOARD MEMBERS
William S. Aichele (a, c)
Chairman
Univest Corporation of Pennsylvania
Souderton, PA
Edward J. Graham (a, b)
Chairman and CEO
South Jersey Industries
Folsom, NJ
Patrick T. Harker (a, c, d)
President
University of Delaware
Newark, DE
David R. Hunsicker (a, b)
Chairman, President, and CEO
New Tripoli Bank
New Tripoli, PA

Brian M. McNeill (a, b)
President and CEO
TouchPoint, Inc.
Concordville, PA
Frederick C. “Ted” Peters II (a, b, d)
Chairman and CEO
Bryn Mawr Trust Company
Bryn Mawr, PA
Rosemary Turner (a, c), (not pictured)
President
United Parcel Service —
North California District
Oakland, CA
(a) Executive Committee
(b) Audit Committee
(c) Management & Budget Committee
(d) Nominating & Governance Committee

Left to right: Edward J. Graham and Frederick C. “Ted” Peters II

Left to right: Michael J. Angelakis, William S. Aichele, and Brian M. McNeill

25
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

ECONOMIC ADVISORY COUNCIL
FEDERAL RESERVE BANK OF PHILADELPHIA

Michael Araten
President and CEO
Rodon Group and K’NEX Brands
Hatfield, PA
Madeline Bell
President and COO
The Children’s Hospital
of Philadelphia
Philadelphia, PA
Ernest J. Dianastasis
Managing Director
ComputerAid, Inc.
Wilmington, DE
Thomas J. Doll
President, COO, and CFO
Subaru of America, Inc.
Cherry Hill, NJ

Varsovia Fernandez
President and CEO
Greater Philadelphia Hispanic Chamber of
Commerce
Philadelphia, PA
Chris Gheysens
President and CEO
Wawa, Inc.
Wawa, PA
Patrick Magri
Senior Vice President,
Managed Markets and Policy
Merck & Co., Inc.
North Wales, PA
Michael Pearson
President
Union Packaging, LLC
Yeadon, PA

William Polacek
President and CEO
JWF Industries
Johnstown, PA
M. Shawn Puccio
Senior Vice President of Finance
Saint-Gobain Corporation
Valley Forge, PA
Maria Rodale
Chairman and CEO
Rodale, Inc.
Emmaus, PA
Lynn Utter
President and C0O
Knoll Office
Philadelphia, PA

Left to right, sitting: M. Shawn Puccio, Michael Araten, and Patrick Magri; from left, second row: Varsovia Fernandez, Michael Pearson,
William Polacek, Maria Rodale, Chris Gheysens, and Madeline Bell; not pictured: Ernest J. Dianastasis, Lynn Utter, and Thomas J. Doll

26
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

COMMUNITY DEPOSITORY INSTITUTIONS ADVISORY COUNCIL
FEDERAL RESERVE BANK OF PHILADELPHIA

Marcie Barber
President and CEO
Juniata Valley Financial Corporation and
The Juniata Valley Bank
Mifflintown, PA
Anthony Biondi
CEO and Director
MNB Corporation and Merchants Bank of
Bangor
Bangor, PA
Dennis D. Cirucci
President, CEO, and Director
Alliance Bancorp Inc. of Pennsylvania and
Alliance Bank
Broomall, PA
Ed Dietzler
President
The Bank of Princeton
Princeton, NJ

David E. Gillan
Chairman and CEO
County Bank
Rehoboth Beach, DE
Richard Grafmyre
President and CEO
Jersey Shore State Bank
Penns Woods Bancorp, Inc.
Thomas M. Petro
President and CEO
Fox Chase Bancorp, Inc.
Hatboro, PA
Gerald L. Reeves
President, CEO, and Director
Sturdy Savings Bank
Stone Harbor, NJ

Gregory A. Smith
President and CEO
Pennsylvania State Employees Credit
Union (PSECU)
Harrisburg, PA
Angela Snyder
Vice Chair and CEO
Fulton Bank of New Jersey
Mount Laurel, NJ
Mark Turner
President and CEO
WSFS Financial Corporation and WSFS
Bank
Wilmington, DE
Glenn L. Wilson
President and CEO
AmeriServ Financial, Inc.
Johnstown, PA

Left to right, sitting: Thomas M. Petro, Angela Snyder, Dennis D. Cirucci; from left, second row: Anthony Biondi, Ed Dietzler, Gregory A.
Smith, Mark Turner, Glenn L. Wilson, Gerald L. Reeves, David E. Gillan, and Marcie Barber; not pictured: Richard Grafmyre

27
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

MANAGEMENT COMMITTEE
FEDERAL RESERVE BANK OF PHILADELPHIA

Charles I. Plosser
President and Chief Executive Officer
D. Blake Prichard
First Vice President and
Chief Operating Officer
William W. Lang
Executive Vice President and
Lending Officer
Supervision, Regulation & Credit

Michael Dotsey
Senior Vice President and
Director of Research
Donna L. Franco
Senior Vice President and
Chief Financial Officer
Terry E. Harris
Senior Vice President and
Chief Information Officer
Information Technology Services

Mary Ann Hood
Senior Vice President and
EEO Officer, Human Resources
Director, Office of Diversity and
Inclusion
Arun K. Jain
Senior Vice President
Treasury and Financial Services
Jeanne R. Rentezelas
Senior Vice President and
General Counsel
Legal
Milissa M. Tadeo
Senior Vice President
Corporate Affairs
Herbert E. Taylor
Vice President and
Corporate Secretary
Office of the Secretary

Left to right, sitting: Charles I. Plosser,
D. Blake Prichard, Mary Ann Hood,
Herbert E. Taylor; from left, second
row: Jeanne Rentezelas,
Terry E. Harris, Michael Dotsey,
Donna L. Franco, Arun K. Jain,
Milissa M. Tadeo, and William W. Lang

28
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

ADDITIONAL BANK OFFICERS
FEDERAL RESERVE BANK OF PHILADELPHIA

John D. Ackley
Vice President
Cash Services

Patrick M. Regan
Vice President
Information Technology Services

Roc Armenter
Vice President and Economist
Research

Michelle M. Scipione
Vice President and General
Auditor
Audit

Mitchell Berlin
Vice President and Economist
Research
Donna L. Brenner
Vice President
Enterprise Risk Management
Jennifer E. Cardy
Vice President
Financial Management Services
Larry Cordell
Vice President
Supervision, Regulation & Credit
James S. Ely
Vice President
Public Affairs
Gregory Fanelli
Vice President
Information Technology Services
Charles Kirkland
Vice President
Financial Statistics

Michael Costello
Assistant Vice President
Supervision, Regulation & Credit

Keith Sill
Vice President and Director
Real-Time Data Research Center
Research

Michael T. Doyle
Assistant Vice President
Treasury Payments

Christopher Henderson
Assistant Vice President
Supervision, Regulation & Credit

Vish P. Viswanathan
Vice President and
Discount Officer
Supervision, Regulation & Credit

Alice Menzano
Vice President of Compliance for
End User Services
National IT

James K. Welch
Vice President
Law Enforcement and Facilities
Management

Robert F. Mucerino
Vice President
Treasury Services

Joanne M. Branigan
Assistant Vice President
Supervision, Regulation & Credit

Leonard Nakamura
Vice President and Economist
Research

Brian Calderwood
Assistant Vice President
Groupware Leadership Center

A. Reed Raymond III
Vice President and
Chief Administrative Officer
Supervision, Regulation &
Credit

Paul Calem
Assistant Vice President
Supervision, Regulation & Credit

Stephen J. Smith
Assistant Vice President and
Counsel
Legal

H. Robert Tillman
Assistant Vice President
Supervision, Regulation & Credit

Stephen G. Hart
Assistant Vice President
Human Resources

Patrick F. Turner
Vice President and
Managing Officer
Groupware Leadership Center

Anthony T. Scafide Jr.
Assistant Vice President
Financial Institutions Relations

Kim Taylor
Assistant Vice President
Human Resources

Suzanne W. Furr
Assistant Vice President and
Assistant General Auditor
Audit

Theresa Y. Singleton
Vice President and
Community Affairs Officer
Community Development
Studies and Education

Robert Hunt
Vice President and Director
Payment Cards Center

Gregory A. Ramick
Assistant Vice President
Cash Services

Maryann T. Connelly
Assistant Vice President and
Counsel
Legal

Stanley Sienkiewicz
Vice President
Research Support
Research

Constance H. Wallgren
Vice President and
Chief Examinations Officer
Supervision, Regulation & Credit

Chellappan Ramasamy
Assistant Vice President
Supervision, Regulation & Credit

Kori Ann Connelly
Assistant Vice President and
Counsel
Legal

Christopher Ivanoski
Assistant Vice President
Facilities — Plant Operations

Gail L. Todd
Assistant Vice President and
Credit Officer
Supervision, Regulation & Credit
William T. Wisser
Assistant Vice President
Supervision, Regulation & Credit
Heather Derbyshire
Officer
Financial Statistics

John P. Kelly
Assistant Vice President
Enterprise Risk Management
Andrew Kish
Assistant Vice President
Supervision, Regulation & Credit
Keith Morales
Assistant Vice President and
Information Security Officer
Information Technology Services
John J. Munera III
Assistant Vice President
Supervision, Regulation & Credit
Robin P. Myers
Assistant Vice President
Supervision, Regulation & Credit

Dawn Karlyn
Officer
Treasury Services
James Lofton
Officer
Cash Services
Pattie Scafide
Officer
Financial Management Services
Linda Van Valkenburg
Officer
Information Technology Services

Wanda Preston
Assistant Vice President
Supervision, Regulation & Credit

Julia Cheney
Assistant Vice President and
Assistant Director
Payment Cards Center

Includes promotions through January 2015

29
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

30
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

2014
STATEMENT OF AUDITOR INDEPENDENCE
FEDERAL RESERVE BANK OF PHILADELPHIA

The Federal Reserve Board engaged Deloitte & Touche LLP (D&T) to audit the 2014 combined and individual financial statements of the Reserve Banks and Maiden Lane LLC.1
In 2014, D&T also conducted audits of internal controls over financial reporting for each of the Reserve Banks. Fees for
D&T’s services totaled $7 million, of which $0.4 million was for the audit of Maiden Lane LLC. To ensure auditor independence, the Board requires that D&T be independent in all matters relating to the audits. Specifically, D&T may not perform
services for the Reserve Banks or others that would place it in a position of auditing its own work, making management
decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2014, the Bank did not
engage D&T for any non-audit services.

In addition, D&T audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve
System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement
benefits to employees of the Board, the Federal Reserve Banks, the OEB, and the Consumer Financial Protection Bureau.

31
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

32
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

FINANCIAL STATEMENT CONTENTS
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

INDEPENDENT AUDITORS’ REPORT

ABBREVIATIONS

FINANCIAL STATEMENTS
STATEMENTS OF CONDITION AS OF DECEMBER 31, 2014, AND DECEMBER 31, 2013

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 2014, AND DECEMBER 31, 2013

STATEMENTS OF CHANGES IN CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2014, AND DECEMBER 31, 2013

NOTES TO FINANCIAL STATEMENTS

33
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

34
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

INDEPENDENT AUDITORS’ REPORT

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35
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

INDEPENDENT AUDITORS’ REPORT — PAGE 2

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36
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

INDEPENDENT AUDITORS’ REPORT — PAGE 3

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37
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

ABBREVIATIONS

ACH

Automated clearinghouse

ASC

Accounting Standards Codification

ASU

Accounting Standards Update

BEP

Benefit Equalization Retirement Plan

Bureau

Bureau of Consumer Financial Protection

FAM

Financial Accounting Manual for Federal Reserve Banks

FASB

Financial Accounting Standards Board

FOMC

Federal Open Market Committee

FRBA

Federal Reserve Bank of Atlanta

FRBNY

Federal Reserve Bank of New York

GAAP

Accounting principles generally accepted in the United States of America

GSE

Government-sponsored enterprise

IMF

International Monetary Fund

MBS

Mortgage-backed securities

SDR

Special drawing rights

SERP

Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks

SOMA

System Open Market Account

TBA

To be announced

TDF

Term Deposit Facility

38
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

STATEMENTS OF CONDITION
FEDERAL RESERVE BANK OF PHILADELPHIA

As of December 31, 2014 and December 31, 2013 (in millions)

2014

2013

ASSETS
Gold certificates
Special drawing rights certificates
Coin
Loans to depository institutions
System Open Market Account:
Treasury securities, net (of which $267 and $497 is lent as of
December 31, 2014 and 2013, respectively)
Government-sponsored enterprise debt securities, net (of which
$15 and $32 is lent as of December 31, 2014 and 2013, respectively)
Federal agency and government-sponsored enterprise mortgage-backed
securities, net
Foreign currency denominated investments, net
Central bank liquidity swaps
Accrued interest receivable
Other assets
Bank premises and equipment, net
Other assets
Total assets

338
$
210
122
7

397
210
123
-

62,198

68,363

958

1,713

42,861
1,571
115
619
1
90
29

44,442
1,835
21
685
87
28

109,119

117,904

LIABILITIES AND CAPITAL
Federal Reserve notes outstanding, net
System Open Market Account:
Securities sold under agreements to repurchase
Other liabilities
Deposits:
Depository institutions
Other deposits
Interest payable to depository institutions
Accrued benefit costs
Accrued remittances to the Treasury
Interdistrict settlement account
Other liabilities

41,512

12,214
20

9,154
39

47,897
28
2
121
7
4,108
16

48,568
21
2
104
84
19,721
12

Total liabilities
105,925

Capital paid-in
1,597
Surplus (including accumulated other comprehensive loss of $25 and $14 at
December 31, 2014 and 2013, respectively)
1,597
Total capital
Total liabilities and capital

3,194
109,119

The accompanying notes are an integral part of these financial statements.
39
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

36,063

113,768
2,068
2,068
4,136
117,904

STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
FEDERAL RESERVE BANK OF PHILADELPHIA

For the years ended December 31, 2014 and December 31, 2013 (in millions)

2014 2013
INTEREST INCOME
System Open Market Account:
Treasury securities, net
$
1,589
Government-sponsored enterprise debt securities, net
40
Federal agency and government-sponsored enterprise
mortgage-backed securities, net
1,296
Foreign currency denominated investments, net
6
Central bank liquidity swaps
-

1,098
8
2

Total interest income
2,931

INTEREST EXPENSE
System Open Market Account:
Securities sold under agreements to repurchase
3
Deposits:
Depository institutions
146
Term Deposit Facility
11
Total interest expense

1,549
66

2,723

2
99
1

160

102

Net interest income
2,771

NON-INTEREST LOSS
System Open Market Account:
Federal agency and government-sponsored enterprise
mortgage-backed securities gains, net
2
Foreign currency translation losses, net
(218)
Other
Compensation received for service costs provided
3
Reimbursable services to government agencies
44
Other
3

2,621

1
(98)
1
4
39
3

Total non-interest loss
(166)

OPERATING EXPENSES
Salaries and benefits
133
Occupancy
15
Equipment
7
Other
47
Assessments:
Board of Governors operating expenses and currency costs
78
Bureau of Consumer Financial Protection
42

(50)

Total operating expenses

Net income before providing for remittances to the Treasury
Earnings remittances to the Treasury

322

2,283
2,625

2,249
2,189

(342)

1
(12)

(11)

Net (loss) income

Change in prior service costs related to benefit plans
Change in actuarial (losses) gains related to benefit plans

Total other comprehensive (loss) income
Comprehensive (loss) income

(353)

The accompanying notes are an integral part of these financial statements.
40
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

124
16
7
51
81
43

STATEMENTS OF CHANGES IN CAPITAL
FEDERAL RESERVE BANK OF PHILADELPHIA

For the years ended December 31, 2014 and December 31, 2013 (in millions, except share data)

Surplus

Accumulated other
Capital
Net income
comprehensive
Total surplus
Total capital
paid-in
retained
income (loss)

Balance at December 31, 2012
(42,324,391 shares)

Net change in capital stock redeemed
(958,630 shares)
Comprehensive income:
Net income
Other comprehensive income
Dividends on capital stock
Net change in capital
Balance at December 31, 2013
(41,365,761 shares)

Net change in capital stock redeemed
(9,433,205 shares)
Comprehensive income:
Net loss
Other comprehensive loss
Dividends on capital stock
Net change in capital

2,116

2,149

(33)

2,116

4,232

(48)

60
(127)

19
-

60
19
(127)

(48)

(67)

(48)

(96)

2,068

2,082

(14)

2,068

4,136

(471)

(342)
(118)

(11)
-

(342)
(11)
(118)

(471)

(460)

(11)

(471)

(942)

Balance at December 31, 2014
(31,932,556 shares)
$ 1,597
$
1,622
$
(25)
$
1,597
$ 3,194

The accompanying notes are an integral part of these financial statements.

41
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

1. STRUCTURE
The Federal Reserve Bank of Philadelphia (Bank) is part of the Federal Reserve System (System) and is one of the 12 Federal
Reserve Banks (Reserve Banks) created by Congress under the Federal Reserve Act of 1913 (Federal Reserve Act), which established the central bank of the United States. The Reserve Banks are chartered by the federal government and possess a
unique set of governmental, corporate, and central bank characteristics. The Bank serves the Third Federal Reserve District,
which includes Delaware and portions of New Jersey and Pennsylvania.
In accordance with the Federal Reserve Act, supervision and control of the Bank is exercised by a board of directors. The Federal Reserve Act specifies the composition of the board of directors for each of the Reserve Banks. Each board is composed
of nine members serving three-year terms: three directors, including those designated as chairman and deputy chairman,
are appointed by the Board of Governors of the Federal Reserve System (Board of Governors) to represent the public, and six
directors are elected by member banks. Banks that are members of the System include all nationally-chartered banks and any
state-chartered banks that apply and are approved for membership. Member banks are divided into three classes according
to size. Member banks in each class elect one director representing member banks and one representing the public. In any
election of directors, each member bank receives one vote, regardless of the number of shares of Reserve Bank stock it holds.
In addition to the 12 Reserve Banks, the System also consists, in part, of the Board of Governors and the Federal Open Market Committee (FOMC). The Board of Governors, an independent federal agency, is charged by the Federal Reserve Act with
a number of specific duties, including general supervision over the Reserve Banks. The FOMC is composed of members of
the Board of Governors, the president of the Federal Reserve Bank of New York (FRBNY), and, on a rotating basis, four other
Reserve Bank presidents.

2. OPERATIONS AND SERVICES
The Reserve Banks perform a variety of services and operations. These functions include participating in formulating and conducting monetary policy; participating in the payment system, including transfers of funds, automated clearinghouse (ACH)
operations, and check collection; distributing coin and currency; performing fiscal agency functions for the U.S. Department
of the Treasury (Treasury), certain federal agencies, and other entities; serving as the federal government’s bank; providing
short-term loans to depository institutions; providing loans to participants in programs or facilities with broad-based eligibility
in unusual and exigent circumstances; serving consumers and communities by providing educational materials and information regarding financial consumer protection rights and laws and information on community development programs and
activities; and supervising bank holding companies, state member banks, savings and loan holding companies, U.S. offices of
foreign banking organizations, and designated financial market utilities pursuant to authority delegated by the Board of Governors. Certain services are provided to foreign and international monetary authorities, primarily by the FRBNY.
The FOMC, in conducting monetary policy, establishes policy regarding domestic open market operations, oversees these operations, and issues authorizations and directives to the FRBNY to execute transactions. The FOMC authorizes and directs the
FRBNY to conduct operations in domestic markets, including the direct purchase and sale of Treasury securities, governmentsponsored enterprise (GSE) debt securities, and federal agency and GSE mortgage-backed securities (MBS); the purchase of
these securities under agreements to resell; and the sale of these securities under agreements to repurchase. The FRBNY
holds the resulting securities and agreements in a portfolio known as the System Open Market Account (SOMA). The FRBNY
is authorized and directed to lend the Treasury securities and GSE debt securities that are held in the SOMA.

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To be prepared to counter disorderly conditions in foreign exchange markets or to meet other needs specified by the FOMC
to carry out the System’s central bank responsibilities, the FOMC has authorized and directed the FRBNY to execute spot and
forward foreign exchange transactions in 14 foreign currencies, to hold balances in those currencies, and to invest such foreign
currency holdings, while maintaining adequate liquidity. The FRBNY holds these securities and obligations in the SOMA. The
FOMC has also authorized the FRBNY to maintain reciprocal currency arrangements with the Bank of Canada and the Bank of
Mexico in the maximum amounts of $2 billion and $3 billion, respectively, and to warehouse foreign currencies for the Treasury and the Exchange Stabilization Fund in the maximum amount of $5 billion.
Because of the global character of bank funding markets, the System has at times coordinated with other central banks to provide liquidity. The FOMC authorized and directed the FRBNY to establish U.S. dollar liquidity and reciprocal foreign currency
liquidity swap lines with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the
Swiss National Bank. The FRBNY holds amounts outstanding under these swap lines in the SOMA. These swap lines, which
were originally established as temporary arrangements, were converted to standing arrangements on October 31, 2013, and
will remain in place until further notice.
Although the Reserve Banks are separate legal entities, they collaborate on the delivery of certain services to achieve greater
efficiency and effectiveness. This collaboration takes the form of centralized operations and product or function offices that
have responsibility for the delivery of certain services on behalf of the Reserve Banks. Various operational and management
models are used and are supported by service agreements between the Reserve Banks. In some cases, costs incurred by a
Reserve Bank for services provided to other Reserve Banks are not shared; in other cases, the Reserve Banks are reimbursed
for costs incurred in providing services to other Reserve Banks. Major services provided by the Bank on behalf of the System
for which the costs were not reimbursed by the other Reserve Banks include Collateral Management System, Groupware
Leadership Center, and Video Conferencing Network.

3. SIGNIFICANT ACCOUNTING POLICIES
Accounting principles for entities with the unique powers and responsibilities of the nation’s central bank have not been formulated by accounting standard-setting bodies. The Board of Governors has developed specialized accounting principles and
practices that it considers to be appropriate for the nature and function of a central bank. These accounting principles and
practices are documented in the Financial Accounting Manual for Federal Reserve Banks (FAM), which is issued by the Board
of Governors. The Reserve Banks are required to adopt and apply accounting policies and practices that are consistent with
the FAM. The financial statements have been prepared in accordance with the FAM.
Limited differences exist between the accounting principles and practices in the FAM and accounting principles generally accepted in the United States of America (GAAP), due to the unique nature of the Bank’s powers and responsibilities as part of
the nation’s central bank and given the System’s unique responsibility to conduct monetary policy. The primary differences
are the presentation of all SOMA securities holdings at amortized cost, adjusted for credit impairment, if any, the recording
of all SOMA securities on a settlement-date basis, and the use of straight-line amortization for Treasury securities, GSE debt
securities, and foreign currency denominated investments. Amortized cost, rather than the fair value presentation, more
appropriately reflects the financial position associated with the Bank’s securities holdings given the System’s unique responsibility to conduct monetary policy. Although the application of fair value measurements to the securities holdings may result
in values substantially greater or less than their carrying values, these unrealized changes in value have no direct effect on
the quantity of reserves available to the banking system or on the ability of the Reserve Banks, as the central bank, to meet
their financial obligations and responsibilities. Both the domestic and foreign components of the SOMA portfolio may involve
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transactions that result in gains or losses when holdings are sold before maturity. Decisions regarding securities and foreign
currency transactions, including their purchase and sale, are motivated by monetary policy objectives rather than profit. Accordingly, fair values, earnings, and gains or losses resulting from the sale of such securities and currencies are incidental to
open market operations and do not motivate decisions related to policy or open market activities. Accounting for these securities on a settlement-date basis, rather than the trade-date basis required by GAAP, better reflects the timing of the transaction’s effect on the quantity of reserves in the banking system. The cost bases of Treasury securities, GSE debt securities, and
foreign government debt instruments are adjusted for amortization of premiums or accretion of discounts on a straight-line
basis, rather than using the interest method required by GAAP.
In addition, the Bank does not present a Statement of Cash Flows as required by GAAP because the liquidity and cash position
of the Bank are not a primary concern given the Reserve Bank’s unique powers and responsibilities as a central bank. Other
information regarding the Bank’s activities is provided in, or may be derived from, the Statements of Condition, Income and
Comprehensive Income, and Changes in Capital, and the accompanying notes to the financial statements. Other than those
described above, there are no significant differences between the policies outlined in the FAM and GAAP.
Preparing the financial statements in conformity with the FAM requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could
differ from those estimates.
In 2014, the description of certain line items presented in the Statements of Condition and the Statements of Income and
Comprehensive Income have been revised to better reflect the nature of these items. Amounts related to these line items
were not changed from the prior year, only the nomenclature for the line item was revised, as further noted below:
•

The line item “System Open Market Account: Other investments” has been revised in the Statements of Condition to
“System Open Market Account: Other assets.”

•

The line item “System Open Market Account: Foreign currency denominated assets, net” has been revised in the Statements of Income and Comprehensive Income to “System Open Market Account: Foreign currency denominated investments, net.”

Certain amounts relating to the prior year have been reclassified in the Statements of Income and Comprehensive Income
to conform to the current year presentation. $1 million previously reported for the year ended December 31, 2013 as “Noninterest loss: Other” has been reclassified into a new line titled “Non-interest loss: System Open Market Account: Other.”
Significant accounts and accounting policies are explained below.
a. Consolidation
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) established the Bureau of Consumer Financial Protection (Bureau) as an independent bureau within the System that has supervisory authority over some
institutions previously supervised by the Reserve Banks in connection with those institutions’ compliance with consumer protection statutes. Section 1017 of the Dodd-Frank Act provides that the financial statements of the Bureau are not to be consolidated with those of the Board of Governors or the System. The Board of Governors funds the Bureau through assessments

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on the Reserve Banks as required by the Dodd-Frank Act. The Reserve Banks reviewed the law and evaluated the design of
and their relationship to the Bureau and determined that it should not be consolidated in the Bank’s financial statements.
b. Gold and Special Drawing Rights Certificates
The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks. Upon authorization, the Reserve
Banks acquire gold certificates by crediting equivalent amounts in dollars to the account established for the Treasury. The gold
certificates held by the Reserve Banks are required to be backed by the gold owned by the Treasury. The Treasury may reacquire the gold certificates at any time, and the Reserve Banks must deliver them to the Treasury. At such time, the Treasury’s
account is charged, and the Reserve Banks’ gold certificate accounts are reduced. The value of gold for purposes of backing
the gold certificates is set by law at $42 2/9 per fine troy ounce. Gold certificates are recorded by the Banks at original cost.
The Board of Governors allocates the gold certificates among the Reserve Banks once a year based on each Reserve Bank’s
average Federal Reserve notes outstanding during the preceding twelve months.
Special drawing rights (SDR) are issued by the International Monetary Fund (IMF) to its members in proportion to each member’s quota in the IMF at the time of issuance. SDRs serve as a supplement to international monetary reserves and may
be transferred from one national monetary authority to another. Under the law providing for U.S. participation in the SDR
system, the Secretary of the Treasury is authorized to issue SDR certificates to the Reserve Banks. When SDR certificates are
issued to the Reserve Banks, equivalent amounts in U.S. dollars are credited to the account established for the Treasury and
the Reserve Banks’ SDR certificate accounts are increased. The Reserve Banks are required to purchase SDR certificates, at
the direction of the Treasury, for the purpose of financing SDR acquisitions or for financing exchange-stabilization operations.
At the time SDR certificate transactions occur, the Board of Governors allocates the SDR certificates among the Reserve Banks
based upon each Reserve Bank’s Federal Reserve notes outstanding at the end of the preceding calendar year. SDR certificates are recorded by the Banks at original cost. There were no SDR certificate transactions during the years ended December
31, 2014 and 2013.
c. Coin
The amount reported as coin in the Statements of Condition represents the face value of all United States coin held by the
Bank. The Bank buys coin at face value from the U.S. Mint in order to fill depository institution orders.
d. Loans
Loans to depository institutions are reported at their outstanding principal balances and interest income is recognized on an
accrual basis.
Loans are impaired when current information and events indicate that it is probable that the Bank will not receive the principal and interest that are due in accordance with the contractual terms of the loan agreement. Impaired loans are evaluated
to determine whether an allowance for loan loss is required. The Bank has developed procedures for assessing the adequacy
of any allowance for loan losses using all available information to identify incurred losses. This assessment includes monitoring information obtained from banking supervisors, borrowers, and other sources to assess the credit condition of the borrowers and, as appropriate, evaluating collateral values. Generally, the Bank would discontinue recognizing interest income
on impaired loans until the borrower’s repayment performance demonstrates principal and interest would be received in
accordance with the terms of the loan agreement. If the Bank discontinues recording interest on an impaired loan, cash payments are first applied to principal until the loan balance is reduced to zero; subsequent payments are applied as recoveries
of amounts previously deemed uncollectible, if any, and then as interest income.
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e. Securities Purchased Under Agreements to Resell, Securities Sold Under Agreements to Repurchase, and Securities Lending
The FRBNY may engage in purchases of securities with primary dealers under agreements to resell (repurchase transactions).
These repurchase transactions are typically settled through a tri-party arrangement. In a tri-party arrangement, two commercial custodial banks manage the collateral clearing, settlement, pricing, and pledging, and provide cash and securities
custodial services for and on behalf of the FRBNY and counterparty. The collateral pledged must exceed the principal amount
of the transaction by a margin determined by the FRBNY for each class and maturity of acceptable collateral. Collateral designated by the FRBNY as acceptable under repurchase transactions primarily includes Treasury securities (including Treasury
Inflation-Protected Securities, Separate Trading of Registered Interest and Principal of Securities Treasury securities, and Treasury Floating Rate Notes); direct obligations of several federal and GSE-related agencies, including Federal National Mortgage
Association, Federal Home Loan Mortgage Corporation, and Federal Home Loan Banks; and pass-through federal agency
and GSE MBS. The repurchase transactions are accounted for as financing transactions with the associated interest income
recognized over the life of the transaction. These transactions are reported at their contractual amounts as “System Open
Market Account: Securities purchased under agreements to resell” and the related accrued interest receivable is reported as
a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition.
The FRBNY may engage in sales of securities under agreements to repurchase with primary dealers and with a set of expanded
counterparties which includes banks, savings associations, GSEs, and domestic money market funds (Overnight and term
reverse repurchase agreements). These reverse repurchase transactions are settled through a tri-party arrangement, similar
to repurchase transactions. Reverse repurchase transactions may also be executed with foreign official and international
account holders as part of a service offering. Reverse repurchase agreements are collateralized by a pledge of an amount
of Treasury securities, GSE debt securities, or federal agency and GSE MBS that are held in the SOMA. Reverse repurchase
transactions are accounted for as financing transactions, and the associated interest expense is recognized over the life of
the transaction. These transactions are reported at their contractual amounts as “System Open Market Account: Securities
sold under agreements to repurchase” and the related accrued interest payable is reported as a component of “System Open
Market Account: Other liabilities” in the Statements of Condition.
Treasury securities and GSE debt securities held in the SOMA may be lent to primary dealers, typically overnight, to facilitate
the effective functioning of the domestic securities markets. The amortized cost basis of securities lent continues to be reported as “System Open Market Account: Treasury securities, net” and “System Open Market Account: Government-sponsored enterprise debt securities, net,” as appropriate, in the Statements of Condition. Securities lending transactions are fully
collateralized by Treasury securities based on the fair values of the securities lent increased by a margin determined by the
FRBNY. The FRBNY charges the primary dealer a fee for borrowing securities, and these fees are reported as a component of
“Non-interest loss: System Open Market Account: Other” in the Statements of Income and Comprehensive Income.
Activity related to securities purchased under agreements to resell, securities sold under agreements to repurchase, and
securities lending is allocated to each of the Reserve Banks on a percentage basis derived from an annual settlement of the
interdistrict settlement account that occurs in the second quarter of each year.
f. Treasury Securities, Government-Sponsored Enterprise Debt Securities, Federal Agency and Government-Sponsored
Enterprise Mortgage-Backed Securities, Foreign Currency Denominated Investments, and Warehousing Agreements
Interest income on Treasury securities, GSE debt securities, and foreign currency denominated investments included in the
SOMA is accrued using the straight-line method. Interest income on federal agency and GSE MBS is accrued using the interest method and includes amortization of premiums, accretion of discounts, and gains or losses associated with principal
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paydowns. Premiums and discounts related to federal agency and GSE MBS are amortized or accreted over the term of the
security to stated maturity, and the amortization of premiums and accretion of discounts are accelerated when principal
payments are received. Gains and losses resulting from sales of securities are determined by specific issue based on average
cost. Treasury securities, GSE debt securities, and federal agency and GSE MBS are reported net of premiums and discounts
in the Statements of Condition and interest income on those securities is reported net of the amortization of premiums and
accretion of discounts in the Statements of Income and Comprehensive Income.
In addition to outright purchases of federal agency and GSE MBS that are held in the SOMA, the FRBNY enters into dollar roll
transactions (dollar rolls), which primarily involve an initial transaction to purchase or sell “to be announced” (TBA) MBS for
delivery in the current month combined with a simultaneous agreement to sell or purchase TBA MBS on a specified future
date. During the years ended December 31, 2014 and 2013, the FRBNY executed dollar rolls to facilitate settlement of outstanding purchases of federal agency and GSE MBS. The FRBNY accounts for dollar rolls as purchases or sales on a settlementdate basis. In addition, TBA MBS transactions may be paired off or assigned prior to settlement. Net gains (losses) resulting
from these MBS transactions are reported as “Non-interest loss: System Open Market Account: Federal agency and government-sponsored enterprise mortgage-backed securities gains, net” in the Statements of Income and Comprehensive Income.
Foreign currency denominated investments, which can include foreign currency deposits, securities purchased under agreements to resell, and government debt instruments, are revalued daily at current foreign currency market exchange rates in
order to report these assets in U.S. dollars. Foreign currency translation gains and losses that result from the daily revaluation
of foreign currency denominated investments are reported as “Non-interest loss: System Open Market Account: Foreign currency translation losses, net” in the Statements of Income and Comprehensive Income.
Because the FRBNY enters into commitments to buy Treasury securities, federal agency and GSE MBS, and foreign government debt instruments and records the related securities on a settlement-date basis in accordance with the FAM, the related
outstanding commitments are not reflected in the Statements of Condition.
Activity related to Treasury securities, GSE debt securities, and federal agency and GSE MBS, including the premiums, discounts, and realized gains and losses, is allocated to each Reserve Bank on a percentage basis derived from an annual settlement of the interdistrict settlement account that occurs in the second quarter of each year. Activity related to foreign currency denominated investments, including the premiums, discounts, and realized and unrealized gains and losses, is allocated
to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital
and surplus at the preceding December 31.
Warehousing is an arrangement under which the FOMC has approved the exchange, at the request of the Treasury, of U.S. dollars for foreign currencies held by the Treasury over a limited period. The purpose of the warehousing facility is to supplement
the U.S. dollar resources of the Treasury for financing purchases of foreign currencies and related international operations.
Warehousing agreements are valued daily at current market exchange rates. Activity related to these agreements is allocated
to each Reserve Bank based on the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital
and surplus at the preceding December 31.
g. Central Bank Liquidity Swaps
Central bank liquidity swaps, which are transacted between the FRBNY and a foreign central bank, can be structured as either
U.S. dollar or foreign currency liquidity swap arrangements.
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Central bank liquidity swaps activity, including the related income and expense, is allocated to each Reserve Bank based on
the ratio of each Reserve Bank’s capital and surplus to the Reserve Banks’ aggregate capital and surplus at the preceding December 31. The foreign currency amounts associated with these central bank liquidity swap arrangements are revalued daily
at current foreign currency market exchange rates.
U.S. dollar liquidity swaps
At the initiation of each U.S. dollar liquidity swap transaction, the foreign central bank transfers a specified amount of its currency to a restricted account for the FRBNY in exchange for U.S. dollars at the prevailing market exchange rate. Concurrent
with this transaction, the FRBNY and the foreign central bank agree to a second transaction that obligates the foreign central
bank to return the U.S. dollars and the FRBNY to return the foreign currency on a specified future date at the same exchange
rate as the initial transaction. The Bank’s allocated portion of the foreign currency amounts that the FRBNY acquires are reported as “System Open Market Account: Central bank liquidity swaps” in the Statements of Condition. Because the swap
transaction will be unwound at the same U.S. dollar amount and exchange rate that were used in the initial transaction, the
recorded value of the foreign currency amounts is not affected by changes in the market exchange rate.
The foreign central bank compensates the FRBNY based on the amount outstanding and the rate under the swap agreement. The
Bank’s allocated portion of the amount of compensation received during the term of the swap transaction is reported as “Interest
income: System Open Market Account: Central bank liquidity swaps” in the Statements of Income and Comprehensive Income.
Foreign currency liquidity swaps
The structure of foreign currency liquidity swap transactions involves the transfer by the FRBNY, at the prevailing market exchange rate, of a specified amount of U.S. dollars to an account for the foreign central bank in exchange for its currency. The
foreign currency amounts that the FRBNY receives are recorded as a liability.
h. Bank Premises, Equipment, and Software
Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line
basis over the estimated useful lives of the assets, which range from 2 to 50 years. Major alterations, renovations, and improvements are capitalized at cost as additions to the asset accounts and are depreciated over the remaining useful life of the
asset or, if appropriate, over the unique useful life of the alteration, renovation, or improvement. Maintenance, repairs, and
minor replacements are charged to operating expense in the year incurred.
Costs incurred to acquire software are capitalized based on the purchase price. Costs incurred during the application development stage to develop internal-use software are capitalized based on the cost of direct services and materials associated with
designing, coding, installing, and testing the software. Capitalized software costs are amortized on a straight-line basis over
the estimated useful lives of the software applications, which generally range from two to five years. Maintenance costs and
minor replacements related to software are charged to operating expense in the year incurred.
Capitalized assets, including software, buildings, leasehold improvements, furniture, and equipment, are impaired and an
adjustment is recorded when events or changes in circumstances indicate that the carrying amount of assets or asset groups
is not recoverable and significantly exceeds the assets’ fair value.
i. Interdistrict Settlement Account
Each Reserve Bank aggregates the payments due to or from other Reserve Banks. These payments result from transactions
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between the Reserve Banks and transactions that involve depository institution accounts held by other Reserve Banks, such as
Fedwire funds and securities transfers and check and ACH transactions. The cumulative net amount due to or from the other
Reserve Banks is reflected in the “Interdistrict settlement account” in the Statements of Condition.
An annual settlement of the interdistrict settlement account occurs in the second quarter of each year. As a result of the annual settlement, the balance in each Bank’s interdistrict settlement account is adjusted by an amount equal to the average
balance in the account during the previous twelve-month period ended March 31. An equal and offsetting adjustment is made
to each Bank’s allocated portion of SOMA assets and liabilities.
j. Federal Reserve Notes
Federal Reserve notes are the circulating currency of the United States. These notes, which are identified as issued to a specific Reserve Bank, must be fully collateralized. All of the Bank’s assets are eligible to be pledged as collateral. The collateral
value is equal to the book value of the collateral tendered with the exception of securities, for which the collateral value is
equal to the par value of the securities tendered. The par value of securities sold under agreements to repurchase is deducted
from the eligible collateral value.
The Board of Governors may, at any time, call upon a Reserve Bank for additional security to adequately collateralize outstanding Federal Reserve notes. To satisfy the obligation to provide sufficient collateral for outstanding Federal Reserve notes, the
Reserve Banks have entered into an agreement that provides for certain assets of the Reserve Banks to be jointly pledged as
collateral for the Federal Reserve notes issued to all Reserve Banks. In the event that this collateral is insufficient, the Federal
Reserve Act provides that Federal Reserve notes become a first and paramount lien on all the assets of the Reserve Banks.
Finally, Federal Reserve notes are obligations of the United States government.
“Federal Reserve notes outstanding, net” in the Statements of Condition represents the Bank’s Federal Reserve notes outstanding, reduced by the Bank’s currency holdings of $4,940 million and $5,920 million at December 31, 2014 and 2013, respectively.
At December 31, 2014 and 2013, all Federal Reserve notes outstanding, reduced by the Reserve Bank’s currency holdings,
were fully collateralized. At December 31, 2014, all gold certificates, all special drawing rights certificates, and $1,282 billion
of domestic securities held in the SOMA were pledged as collateral. At December 31, 2014, no investments denominated in
foreign currencies were pledged as collateral.
k. Deposits
Depository Institutions
Depository institutions’ deposits represent the reserve and service-related balances in the accounts that depository institutions hold at the Bank. The interest rates paid on required reserve balances and excess balances are determined by the Board
of Governors, based on an FOMC-established target range for the federal funds rate. Interest payable is reported as a component of “Interest payable to depository institutions” in the Statements of Condition.
The Term Deposit Facility (TDF) consists of deposits with specific maturities held by eligible institutions at the Reserve Banks.
The Reserve Banks pay interest on these deposits at interest rates determined by auction. Interest payable is reported as a
component of “Interest payable to depository institutions” in the Statements of Condition. There were no deposits held by
the Bank under the TDF at December 31, 2014 and 2013.

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Other
Other deposits include the Bank’s allocated portion of foreign central bank and foreign government deposits held at the
FRBNY. Other deposits also include cash collateral held by the Bank.
l. Capital Paid-in
The Federal Reserve Act requires that each member bank subscribe to the capital stock of the Reserve Bank in an amount
equal to six percent of the capital and surplus of the member bank. These shares are nonvoting, with a par value of $100, and
may not be transferred or hypothecated. As a member bank’s capital and surplus changes, its holdings of Reserve Bank stock
must be adjusted. Currently, only one-half of the subscription is paid in, and the remainder is subject to call. A member bank
is liable for Reserve Bank liabilities up to twice the par value of stock subscribed by it.
By law, each Reserve Bank is required to pay each member bank an annual dividend of six percent on the paid-in capital stock.
This cumulative dividend is paid semiannually.
m. Surplus
The Board of Governors requires the Reserve Banks to maintain a surplus equal to the amount of capital paid-in. On a daily
basis, surplus is adjusted to equate the balance to capital paid-in. Accumulated other comprehensive income is reported as
a component of “Surplus” in the Statements of Condition and the Statements of Changes in Capital. Additional information
regarding the classifications of accumulated other comprehensive income is provided in Notes 9 and 10.
n. Remittances to the Treasury
The Board of Governors requires the Reserve Banks to transfer excess earnings to the Treasury as interest on Federal Reserve
notes after providing for the costs of operations, payment of dividends, and reservation of an amount necessary to equate
surplus with capital paid-in. Currently, remittances to the Treasury are made on a weekly basis. This amount is reported as
“Earnings remittances to the Treasury” in the Statements of Income and Comprehensive Income. The amount due to the
Treasury is reported as “Accrued remittances to the Treasury” in the Statements of Condition. See Note 12 for additional information on earnings remittances to the Treasury.
If earnings during the year are not sufficient to provide for the costs of operations, payment of dividends, and equating surplus
and capital paid-in, remittances to the Treasury are suspended. A deferred asset is recorded that represents the amount of
net earnings a Reserve Bank will need to realize before remittances to the Treasury resume. This deferred asset is periodically
reviewed for impairment.
o. Income and Costs Related to Treasury Services
When directed by the Secretary of the Treasury, the Bank is required by the Federal Reserve Act to serve as fiscal agent and
depositary of the United States Government. By statute, the Treasury has appropriations to pay for these services. During the
years ended December 31, 2014 and 2013, the Bank was reimbursed for substantially all services provided to the Treasury as
its fiscal agent.
The Bank seeks reimbursement from the Treasury and other government agencies on behalf of all Reserve Banks of costs of
performing fiscal agency functions. Each Reserve Bank transfers its Treasury reimbursement receivable to the Bank. The reimbursement receivable is reported in “Other assets” and totaled $2 million for each of the years ended December 31, 2014
and 2013. There was no cost of unreimbursed Treasury services at December 31, 2014. The cost of unreimbursed Treasury
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services is reported in “Other expense” and was immaterial at December 31, 2013.
p. Compensation Received for Service Costs Provided
The Federal Reserve Bank of Atlanta (FRBA) has overall responsibility for managing the Reserve Banks’ provision of check
and ACH services to depository institutions, the FRBNY has overall responsibility for managing the Reserve Banks’ provision
of Fedwire funds and securities services, and the Federal Reserve Bank of Chicago has overall responsibility for managing the
Reserve Banks’ provision of electronic access services to depository institutions. The Reserve Bank that has overall responsibility for managing these services recognizes the related total System revenue in its Statements of Income and Comprehensive
Income. The Bank is compensated for costs incurred to provide these services by the Reserve Banks responsible for managing
these services and reports this compensation as “Non-interest loss: Compensation received for service costs provided” in its
Statements of Income and Comprehensive Income.
q. Assessments
The Board of Governors assesses the Reserve Banks to fund its operations and the operations of the Bureau. These assessments are allocated to each Reserve Bank based on each Reserve Bank’s capital and surplus balances. The Board of Governors
also assesses each Reserve Bank for expenses related to producing, issuing, and retiring Federal Reserve notes based on each
Reserve Bank’s share of the number of notes comprising the System’s net liability for Federal Reserve notes on December 31
of the prior year.
The Dodd-Frank Act requires that, after the transfer of its responsibilities to the Bureau on July 21, 2011, the Board of Governors fund the Bureau in an amount not to exceed a fixed percentage of the total operating expenses of the System as reported
in the Board of Governors’ 2009 annual report, which totaled $4.98 billion. After 2013, the amount will be adjusted annually
in accordance with the provisions of the Dodd-Frank Act. The percentage of total operating expenses of the System for the
years ended December 31, 2014 and 2013 was 12.22 percent ($608.4 million) and 12 percent ($597.6 million), respectively.
The Bank’s assessment for Bureau funding is reported as “Assessments: Bureau of Consumer Financial Protection” in the
Statements of Income and Comprehensive Income.
r. Taxes
The Reserve Banks are exempt from federal, state, and local taxes, except for taxes on real property. The Bank’s real property
taxes were $1 million and $2 million for the years ended December 31, 2014 and 2013, respectively, and are reported as a
component of “Operating expenses: Occupancy” in the Statements of Income and Comprehensive Income.
s. Restructuring Charges
The Reserve Banks recognize restructuring charges for exit or disposal costs incurred as part of the closure of business activities in a particular location, the relocation of business activities from one location to another, or a fundamental reorganization
that affects the nature of operations. Restructuring charges may include costs associated with employee separations, contract terminations, and asset impairments. Expenses are recognized in the period in which the Bank commits to a formalized
restructuring plan or executes the specific actions contemplated in the plan and all criteria for financial statement recognition
have been met.
In 2014, the Treasury announced plans to consolidate the provision of substantially all fiscal agent services for the U.S. Treasury at the Federal Reserve Bank of Cleveland, the Federal Reserve Bank of Kansas City, the FRBNY, and the Federal Reserve
Bank of St. Louis. The implementation plan associated with this consolidation is expected to be completed in 2018.
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Note 11 describes the Bank’s restructuring initiatives and provides information about the costs and liabilities associated with
employee separations and contract terminations. Costs and liabilities associated with enhanced pension benefits in connection with the restructuring activities for all of the Reserve Banks are recorded on the books of the FRBNY.
t. Recently Issued Accounting Standards
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations
and Disclosures of Disposals of Components of an Entity. This update changes the requirements for reporting discontinued
operations, which may include a component of an entity or a group of components of an entity, or a business or nonprofit
activity. This update is effective for the Bank for the year ending December 31, 2015, and is not expected to have a material
effect on the Bank’s financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update was issued to
create common revenue recognition guidance for U.S. GAAP and International Financial Reporting Standards. The guidance
is applicable to all contracts for the transfer of goods or services regardless of industry or type of transaction. This update
requires recognition of revenue in a manner that reflects the consideration that the entity expects to receive in return for the
transfer of goods or services to customers. This update is effective for the Bank for the year ending December 31, 2018, and
is not expected to have a material effect on the Bank’s financial statements.
In June 2014, the FASB issued ASU 2014-11, Transfer and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This update requires changes in the accounting for repurchase to maturity transactions
and repurchase financing transactions. Additionally, this update provides guidance for the disclosures for certain transfers of
financial assets accounted for as sales, where the transferor retains substantially all of the exposure to economic return on the
transferred financial asset; and repurchase agreements, securities lending transactions, and repurchase to maturity transactions that are accounted for as secured borrowings. This update is effective for the Bank for the year ending December 31,
2015, and is not expected to have a material effect on the Bank’s financial statements.

4. LOANS
Loans to Depository Institutions
The Bank offers primary, secondary, and seasonal loans to eligible borrowers, and each program has its own interest rate. Interest is accrued using the applicable interest rate established at least every 14 days by the Bank’s board of directors, subject
to review and determination by the Board of Governors. Primary and secondary loans are extended on a short-term basis,
typically overnight, whereas seasonal loans may be extended for a period of up to nine months.
Primary, secondary, and seasonal loans are collateralized to the satisfaction of the Bank to reduce credit risk. Assets eligible
to collateralize these loans include consumer, business, and real estate loans; Treasury securities; GSE debt securities; foreign
sovereign debt; municipal, corporate, and state and local government obligations; asset-backed securities; corporate bonds;
commercial paper; and bank-issued assets, such as certificates of deposit, bank notes, and deposit notes. Collateral is assigned a lending value that is deemed appropriate by the Bank, which is typically fair value reduced by a margin. Loans to
depository institutions are monitored daily to ensure that borrowers continue to meet eligibility requirements for these programs. If a borrower no longer qualifies for these programs, the Bank will generally request full repayment of the outstanding
loan or, for primary or seasonal loans, may convert the loan to a secondary credit loan. Collateral levels are reviewed daily
against outstanding obligations, and borrowers that no longer have sufficient collateral to support outstanding loans are re52
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

quired to provide additional collateral or to make partial or full repayment.
The loans to depository institutions outstanding as of December 31, 2014 was $7 million with remaining maturity within 15
days. The Bank had no loans outstanding as of December 31, 2013.
At December 31, 2014 and 2013, the Bank did not have any loans that were impaired, restructured, past due, or on non-accrual status, and no allowance for loan losses was required. There were no impaired loans during the years ended December
31, 2014 and 2013.

5. SYSTEM OPEN MARKET ACCOUNT
a. Domestic Securities Holdings
The FRBNY conducts domestic open market operations and, on behalf of the Reserve Banks, holds the resulting securities in
the SOMA.
During the years ended December 31, 2014 and 2013, the FRBNY continued the purchase of Treasury securities and federal
agency and GSE MBS under the large-scale asset purchase programs authorized by the FOMC. In September 2011, the FOMC
announced that the Federal Reserve would reinvest principal payments from the SOMA portfolio holdings of GSE debt securities and federal agency and GSE MBS in federal agency and GSE MBS. In June 2012, the FOMC announced that it would continue this reinvestment policy. In September 2012, the FOMC announced that the Federal Reserve would purchase additional
federal agency and GSE MBS at a pace of $40 billion per month. In December 2012, the FOMC announced that the Federal
Reserve would also purchase longer-term Treasury securities initially at a pace of $45 billion per month after its program
to extend the average maturity of its holdings of Treasury securities was completed in 2012. In December 2013, the FOMC
announced that it would slow the pace of its additional asset purchases. In October 2014, the FOMC concluded its asset
purchase program while maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and
agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at
auction.
The Bank’s allocated share of activity related to domestic open market operations was 2.396 percent and 2.897 percent at
December 31, 2014 and 2013, respectively.

53
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The Bank’s allocated share of Treasury securities, GSE debt securities, and federal agency and GSE MBS, net, excluding accrued
interest, held in the SOMA at December 31 was as follows (in millions):
2014
Par
Notes
Bonds

Unamortized
premiums

39,168
19,799

Unaccreted
discounts

663
2,985

(185)
(232)

Total Treasury securities
$ 58,967
$
3,648
$
(417)

GSE debt securities
$
927
$
31
$

Federal agency and GSE MBS
$ 41,609
$
1,275
$
(23)

Total amortized
cost
$ 39,646
22,552
$ 62,198
$

958

$ 42,861

2013
Par
Notes
Bonds

Unamortized
premiums

42,518
21,480

967
3,724

Unaccreted
discounts
$

(165)
(161)

Total Treasury securities
$ 63,998
$
4,691
$
(326)

GSE debt securities
$
1,658
$
55
$
-

Total amortized
cost
$ 43,320
25,043
$ 68,363
$

1,713

Federal agency and GSE MBS
$ 43,176
$
1,297
$
(31)
$ 44,442

The FRBNY enters into transactions for the purchase of securities under agreements to resell and transactions to sell securities
under agreements to repurchase as part of its monetary policy activities. These operations are for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. In addition, transactions to sell securities under agreements to repurchase are entered into as part of a service offering
to foreign official and international account holders.

54
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

There were no material transactions related to securities purchased under agreements to resell during the years ended December 31, 2014 and 2013. Financial information related to securities sold under agreements to repurchase for the years
ended December 31 was as follows (in millions):
Allocated to the Bank
2014
2013

Overnight and term reverse repurchase agreements:
Contract amount outstanding, end of year
$ 9,504
$ 5,730
Average daily amount outstanding, during the year
3,238
121
Maximum balance outstanding, during the year
9,504
5,730
Securities pledged (par value), end of year
8,750
5,448
Securities pledged (market value), end of year
9,548
5,700

Total SOMA
2014
$ 396,705
130,281
396,705
365,235
398,540

2013
$ 197,755
4,161
197,755
188,028
196,726

Foreign official and international accounts:
Contract amount outstanding, end of year
$ 2,710
$ 3,424
$ 113,132
$ 118,169
Average daily amount outstanding, during the year
2,602
2,876
102,968
95,520
Maximum balance outstanding, during the year
3,424
3,543
122,232
118,169
Securities pledged (par value), end of year
2,596
3,547
108,355
122,424
Securities pledged (market value), end of year
2,710
3,424
113,132
118,175

Total contract amount outstanding, end of year
$ 12,214
$ 9,154
$ 509,837
$ 315,924

Securities pledged as collateral, at December 31, 2014 and 2013, consisted solely of Treasury securities.

55
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The remaining maturity distribution of Treasury securities, GSE debt securities, federal agency and GSE MBS bought outright,
and securities sold under agreements to repurchase that were allocated to the Bank at December 31, 2014 and 2013 was as
follows (in millions):
Within
15 days

16 days
to 90 days

91 days
to 1 year

Over 1 year Over 5 years
to 5 years
to 10 years

Over 10
years

Total

December 31, 2014:
Treasury securities (par value)
$
- $
- $
84 $ 26,662 $ 16,449 $ 15,772 $ 58,967
GSE debt securities (par value)
26
17
94
733
57
927
Federal agency and GSE MBS
(par value)1
155
41,454
41,609
Securities sold under agreements
to repurchase (contract amount)
12,214
12,214

December 31, 2013:
Treasury securities (par value)
$
- $
9 $
5 $ 22,117 $ 25,054 $ 16,813 $ 63,998
GSE debt securities (par value)
67
219
251
1,051
2
68
1,658
Federal agency and GSE MBS
(par value)1
74
43,102
43,176
Securities sold under agreements
to repurchase (contract amount)
9,154
9,154

1
The par amount shown for federal agency and GSE MBS is the remaining principal balance of the securities.

Federal agency and GSE MBS are reported at stated maturity in the table above. The estimated weighted average life of these
securities, which differs from the stated maturity primarily because it factors in scheduled payments and prepayment assumptions, was approximately 5.7 and 6.5 years as of December 31, 2014 and 2013, respectively.
The amortized cost and par value of Treasury securities and GSE debt securities that were loaned from the SOMA under securities lending agreements, at December 31 were as follows (in millions):
Allocated to the Bank
2014 2013
Treasury securities (amortized cost)
Treasury securities (par value)
GSE debt securities (amortized cost)
GSE debt securities (par value)

267
242
15
15

497
448
32
31

Total SOMA
2014 2013
$ 11,144
10,105
633
616

$ 17,153
15,447
1,099
1,055

The FRBNY enters into commitments to buy and sell Treasury securities and records the related securities on a settlementdate basis. As of December 31, 2014, there were no outstanding commitments.

56
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The FRBNY enters into commitments to buy and sell federal agency and GSE MBS and records the related securities on a settlement-date basis. As of December 31, 2014, the total purchase price of the federal agency and GSE MBS under outstanding
purchase commitments was $28,692 million, none of which was related to dollar rolls. The total purchase price of outstanding
purchase commitments allocated to the Bank was $687 million, none of which was related to dollar rolls. As of December 31,
2014, there were no outstanding sales commitments for federal agency and GSE MBS. These commitments, which had contractual settlement dates extending through January 2015, are principally for the purchase of TBA MBS for which the number
and identity of the pools that will be delivered to fulfill the commitment are unknown at the time of the trade. These commitments are subject to varying degrees of off-balance-sheet market risk and counterparty credit risk that result from their future
settlement. The FRBNY requires the posting of cash collateral for MBS commitments as part of its risk management practices
used to mitigate the counterparty credit risk.
Other assets consists primarily of cash and short-term investments related to the federal agency and GSE MBS portfolio. Other liabilities, which are primarily related to federal agency and GSE MBS purchases and sales, includes the FRBNY’s obligation
to return cash margin posted by counterparties as collateral under commitments to purchase and sell federal agency and GSE
MBS. In addition, other liabilities include obligations that arise from the failure of a seller to deliver MBS to the FRBNY on the
settlement date. Although the FRBNY has ownership of and records its investments in the MBS as of the contractual settlement date, it is not obligated to make payment until the securities are delivered, and the amount included in other liabilities
represents the FRBNY’s obligation to pay for the securities when delivered. The amount of other assets and other liabilities
allocated to the Bank and held in the SOMA at December 31 was as follows (in millions):
Allocated to the Bank
2014
Other assets:
MBS portfolio related cash and short term investments $
Other
Total other assets

Total SOMA

2013

2014

2013

1
-

28
1

1
1

Other liabilities:
Cash margin
$
19
$
38
$
793

Obligations from MBS transaction fails
1
1
30
Other
7
Total other liabilities
$

830

$ 1,320
11
$ 1,331

Accrued interest receivable on domestic securities holdings was $25,561 million and $23,405 million as of December 31, 2014
and 2013, respectively, of which $613 million and $678 million, respectively, was allocated to the Bank. These amounts are
reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition.
57
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

Information about transactions related to Treasury securities, GSE debt securities, and federal agency and GSE MBS during the
years ended December 31, 2014 and 2013, is summarized as follows (in millions):
Allocated to the Bank

Total
Federal
Treasury
GSE debt agency and
Notes
Bonds
securities securities GSE MBS

Balance at December 31, 2012
$ 37,759 $ 22,049 $ 59,808 $ 2,627 $ 31,416

Purchases1
10,822
6,235
17,057
26,256
Sales1
Realized gains, net2
Principal payments and maturities
(586)
(8,303)
Amortization of premiums and accretion of discounts, net
(181)
(286)
(467)
(24)
(211)
Inflation adjustment on inflation-indexed securities
8
19
27
Annual reallocation adjustment3
(5,088)
(2,974)
(8,062)
(304)
(4,716)
Balance at December 31, 2013
Purchases1
Sales1
Realized gains, net2
Principal payments and maturities
Amortization of premiums and accretion of discounts, net
Inflation adjustment on inflation-indexed securities
Annual reallocation adjustment3

$ 43,320
4,337
(13)
(140)
12
(7,870)

$ 25,043
2,242
(256)
33
(4,510)

$ 68,363
6,579
(13)
(396)
45
(12,380)

$ 1,713
(494)
(15)
(246)

$ 44,442
11,948
(1)
(5,070)
(179)
(8,279)

Balance at December 31, 2014
$ 39,646 $ 22,552 $ 62,198 $ 958 $ 42,861

Year-ended December 31, 2013
Supplemental information - par value of transactions:
Purchases4
$ 10,744 $ 5,572 $ 16,316 $
$ 25,424
Sales

Year-ended December 31, 2014
Supplemental information - par value of transactions:
Purchases4
$ 4,400 $ 2,198 $ 6,598 $
$ 11,548
Sales
(1)

Purchases and sales may include payments and receipts related to principal, premiums, discounts, and inflation compensation adjustments to the basis of
inflation-indexed securities. The amount reported as sales includes the realized gains and losses on such transactions. Purchases and sales exclude MBS TBA
transactions that are settled on a net basis.
1

Realized gains, net offset the amount of realized gains and losses included in the reported sales amount.

3
Reflects the annual adjustment to the Bank’s allocated portion of the related SOMA securities that results from the annual settlement of the interdistrict
settlement account, as discussed in Note 3i.
2

Includes inflation compensation.

58
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

Total SOMA

Total Federal
Treasury
GSE debt
agency and
Notes
Bonds
securities
securities
GSE MBS

Balance at December 31, 2012
$1,142,219 $ 666,969 $ 1,809,188 $ 79,479
$
950,321

Purchases1
358,656
206,208
564,864
864,537
Sales1
Realized gains, net2
Principal payments and maturities
(21)
(21)
(19,562)
(273,990)
Amortization of premiums and accretion
of discounts, net
(6,024)
(9,503)
(15,527)
(795)
(7,008)
Inflation adjustment on inflation-indexed securities
285
645
930
Balance at December 31, 2013
Purchases1
Sales1
Realized gains, net2
Principal payments and maturities
Amortization of premiums and accretion
of discounts, net
Inflation adjustment on inflation-indexed securities

$1,495,115 $ 864,319
165,306
85,826
(475)
(5,545)
500

(10,132)
1,327

$ 2,359,434
251,132
(475)

$ 59,122
(18,544)

$ 1,533,860
466,384
(29)
(203,933)

(15,677)
1,827

(588)
-

(7,199)
-

Balance at December 31, 2014
$1,654,901 $ 941,340 $ 2,596,241 $ 39,990
$ 1,789,083

Year-ended December 31, 2013
Supplemental information - par value of transactions:
Purchases3
$ 356,766 $ 184,956 $ 541,722 $
$
837,490
Sales

Year-ended December 31, 2014
Supplemental information - par value of transactions:
Purchases3
$ 167,497 $ 83,739 $ 251,236 $
$
450,633
Sales
(29)

2
Realized gains, net offset the amount of realized gains and losses included in the reported sales amount.

3
Includes inflation compensation.
1

b. Foreign Currency Denominated Investments
The FRBNY conducts foreign currency operations and, on behalf of the Reserve Banks, holds the resulting foreign currency
denominated investments in the SOMA.
The FRBNY holds foreign currency deposits with foreign central banks and the Bank for International Settlements and invests
in foreign government debt instruments of Germany, France, and Japan. These foreign government debt instruments are
59
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

backed by the full faith and credit of the issuing foreign governments. In addition, the FRBNY enters into transactions to purchase Euro-denominated government debt securities under agreements to resell for which the accepted collateral is the debt
instruments issued by the governments of Belgium, France, Germany, Italy, the Netherlands, and Spain, which are backed by
the full faith and credit of those issuing governments.
The Bank’s allocated share of activity related to foreign currency operations was 7.519 percent and 7.735 percent at December 31, 2014 and 2013, respectively.
Information about foreign currency denominated investments valued at amortized cost and foreign currency market exchange
rates at December 31 was as follows (in millions):

Allocated to Bank
Total SOMA

2014
2013
2014
2013
Euro:
Foreign currency deposits
$
521
$
582
$
Securities purchased under agreements to resell
197
German government debt instruments
187
185
French government debt instruments
277
186

Japanese yen:
Foreign currency deposits
194
227
Japanese government debt instruments
392
458
Total
$

1,571

1,835

6,936
2,494
3,687

2,576
5,207
20,900

7,530
2,549
2,396
2,397
2,927
5,925

23,724

Accrued interest receivable on foreign currency denominated investments was $83 million and $88 million as of December
31, 2014 and 2013, respectively, of which $6 million and $7 million, respectively, was allocated to the Bank. These amounts
are reported as a component of “System Open Market Account: Accrued interest receivable” in the Statements of Condition.

60
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The remaining maturity distribution of foreign currency denominated investments that were allocated to the Bank at December 31, 2014 and 2013, was as follows (in millions):
Within
15 days
December 31, 2014:
Euro
Japanese yen

16 days to
90 days

273
207

211
30

91 days to
1 year
$

Total

377
233

Total
$
480
$
241
$
240
$

December 31, 2013:
Euro
$
544
$
140
$
167
$
Japanese yen
241
29
145

610

$ 1,571

299
270

$ 1,150
685

569

$ 1,835

Total
$
785
$
169
$

124
116

Over 1 year
to 5 years

312

985
586

There were no foreign exchange contracts related to open market operations outstanding as of December 31, 2014.
The FRBNY enters into commitments to buy foreign government debt instruments and records the related securities on a
settlement-date basis. As of December 31, 2014, there were $137 million of outstanding commitments to purchase foreign
government debt instruments, of which $10 million was allocated to the Bank. These securities settled on January 5, 2015,
and replaced Euro-denominated government debt instruments held in the SOMA that matured on that date. During 2014,
there were purchases and maturities of foreign government debt instruments of $5,494 million and $3,337 million, respectively, of which $414 million and $252 million, respectively, were allocated to the Bank. There were no sales of foreign government debt instruments in 2014.
In connection with its foreign currency activities, the FRBNY may enter into transactions that are subject to varying degrees
of off-balance-sheet market risk and counterparty credit risk that result from their future settlement. The FRBNY controls
these risks by obtaining credit approvals, establishing transaction limits, receiving collateral in some cases, and performing
monitoring procedures.
At December 31, 2014 and 2013, there was no balance outstanding under the authorized warehousing facility.
There were no transactions related to the authorized reciprocal currency arrangements with the Bank of Canada and the Bank
of Mexico during the years ended December 31, 2014 and 2013.
Foreign currency working balances held and foreign exchange contracts executed by the Bank to facilitate its international
payments and currency transactions it made on behalf of foreign central banks and U.S. official institution customers were not
material as of December 31, 2014 and 2013.

61
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

c. Central Bank Liquidity Swaps
U.S. Dollar Liquidity Swaps
The Bank’s allocated share of U.S. dollar liquidity swaps was approximately 7.519 percent and 7.735 percent at December 31,
2014 and 2013, respectively.
The total foreign currency held under U.S. dollar liquidity swaps in the SOMA at December 31, 2014 and 2013, was $1,528
million and $272 million, respectively, of which $115 million and $21 million, respectively, was allocated to the Bank.
The remaining maturity distribution of U.S. dollar liquidity swaps that were allocated to the Bank at December 31 was as follows (in millions):
2014
Within 15
days

Euro
Japanese yen
Total

Within 15 days
days

2013
16 days to
90 days

Total

115

9
-

12
-

21
-

115

Foreign Currency Liquidity Swaps
At December 31, 2014 and 2013, there was no balance outstanding related to foreign currency liquidity swaps.
d. Fair Value of SOMA Assets and Liabilities
The fair value amounts below are presented solely for informational purposes. Although the fair value of SOMA security
holdings can be substantially greater than or less than the recorded value at any point in time, these unrealized gains or losses
have no effect on the ability of the Reserve Banks, as the central bank, to meet their financial obligations and responsibilities.
Because SOMA securities are recorded at amortized cost, cumulative unrealized gains (losses) are not recognized in the Statements of Condition and the changes in cumulative unrealized gains (losses) are not recognized in the Statements of Income
and Comprehensive Income.
The fair value of the Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments in the SOMA’s holdings is subject to market risk, arising from movements in market variables such as interest rates
and credit risk. The fair value of federal agency and GSE MBS is also affected by the expected rate of prepayments of mortgage
loans underlying the securities. The fair value of foreign government debt instruments is also affected by currency risk. Based
on evaluations performed as of December 31, 2014, there are no credit impairments of SOMA securities holdings.

62
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The following table presents the amortized cost, fair value, and cumulative unrealized gains (losses) on the Treasury securities,
GSE debt securities, and federal agency and GSE MBS held in the SOMA at December 31 (in millions):
Allocated to the Bank

2014 2013
Amortized
cost

Treasury securities:
Notes
Bonds
Total Treasury securities
GSE debt securities
Federal agency and GSE MBS

Fair value

Cumulative
unrealized
gains

Amortized
cost

Fair value

Cumulative
unrealized
gains (losses)

39,646 $
22,552

40,328
25,225

682 $
2,673

43,320 $
25,043

43,432 $
24,406

112
(637)

62,198 $

65,553

3,355 $

68,363 $

67,838 $

(525)

958
42,861

1,018
43,615

1,713
44,442

1,803
43,333

60
754

90
(1,109)

Total domestic SOMA portfolio
securities holdings
$ 106,017 $ 110,186 $
4,169 $ 114,518 $ 112,974 $ (1,544)

Memorandum - Commitments for:
Purchases of Treasury securities
$
- $
- $
- $
- $
- $
Purchases of Federal agency
and GSE MBS
687
690
3
1,720
1,713
(7)
Sales of Federal agency and
GSE MBS

Total SOMA

2014 2013

Amortized
cost

Fair value

Cumulative
unrealized
gains

Amortized
cost

Fair value

Cumulative
unrealized
gains (losses)

Treasury securities:
Notes
Bonds

$ 1,654,901
941,340

$ 1,683,377
1,052,916

Total Treasury securities
GSE debt securities
Federal agency and GSE MBS

$ 2,596,241
39,990
1,789,083

$ 2,736,293
42,499
1,820,544

$ 140,052 $ 2,359,434 $ 2,341,336 $ (18,098)
2,509
59,122
62,236
3,114
31,461
1,533,860
1,495,572
(38,288)

28,476 $ 1,495,115 $ 1,499,000 $
3,885
111,576
864,319
842,336
(21,983)

Total domestic SOMA portfolio
securities holdings
$ 4,425,314 $ 4,599,336 $ 174,022 $ 3,952,416 $ 3,899,144 $ (53,272)

Memorandum - Commitments for:
Purchases of Treasury securities
$
- $
- $
- $
- $
- $
Purchases of Federal agency
and GSE MBS
28,692
28,803
111
59,350
59,129
(221)
Sales of Federal agency and
GSE MBS
63
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The fair value of Treasury securities and GSE debt securities was determined using pricing services that provide market consensus prices based on indicative quotes from various market participants. The fair value of federal agency and GSE MBS was
determined using a pricing service that utilizes a model-based approach that considers observable inputs for similar securities.
The cost basis of securities purchased under agreements to resell, securities sold under agreements to repurchase, and other
investments held in the SOMA domestic portfolio approximate fair value.
At December 31, 2014 and 2013, the fair value of foreign currency denominated investments was $20,996 million and $23,802
million, respectively, of which $1,579 million and $1,841 million, respectively, was allocated to the Bank. The fair value of
foreign government debt instruments was determined using pricing services that provide market consensus prices based on
indicative quotes from various market participants. The fair value of foreign currency deposits and securities purchased under
agreements to resell was determined by reference to market interest rates.
The following table provides additional information on the amortized cost and fair values of the federal agency and GSE MBS
portfolio at December 31 (in millions):
2014 2013
Distribution of MBS
holdings by coupon rate
Allocated to the Bank:
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%

Amortized cost
$

306
2,746
12,297
11,531
10,255
3,734
1,570
365
51
6

Fair value
$

302
2,718
12,129
11,724
10,570
4,021
1,694
393
55
9

Amortized cost
$

411
3,588
15,119
10,132
6,672
5,384
2,413
623
88
12

Fair value
$

392
3,432
14,032
9,804
6,696
5,664
2,549
658
93
13

Total
$
42,861
$
43,615
$
44,442
$
43,333

Total SOMA:
2.0%
$
12,788
$
12,618
$
14,191
$
13,529
2.5%
114,609
113,468
123,832
118,458
3.0%
513,289
506,280
521,809
484,275
3.5%
481,305
489,390
349,689
338,357
4.0%
428,047
441,204
230,256
231,113
4.5%
155,867
167,844
185,825
195,481
5.0%
65,544
70,719
83,290
87,968
5.5%
15,232
16,414
21,496
22,718
6.0%
2,110
2,287
3,052
3,225
6.5%
292
320
420
448
Total

$ 1,789,083

$ 1,820,544

64
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

$ 1,533,860

$ 1,495,572

NOTES TO FINANCIAL STATEMENTS

The following tables present the realized gains (losses) and the change in the cumulative unrealized gains (losses) related to
SOMA domestic securities holdings during the years ended December 31, 2014 and 2013 (in millions):
Allocated to Bank
2014 2013

Realized gains
Treasury securities
GSE debt securities
Federal agency and GSE MBS

Change in cumulative
unrealized gains
(losses)2
$

4,056
(15)
1,796

Realized gains
$

Total
$
2
$
5,837
$

Change in cumulative
unrealized losses2

(5,286)
(71)
(2,396)

(7,753)

Total SOMA

2014 2013

Realized gains1
Treasury securities
GSE debt securities
Federal agency and GSE MBS

Change in cumulative
unrealized gains
(losses)2
$

Realized gains1

Change in cumulative
unrealized losses2

158,150
(605)
69,749

(183,225)
(2,411)
(81,957)

Total
$
81
$
227,294

(267,593)

Realized gains are reported in “Non-interest loss: System Open Market Account” in the Statements of Income and Comprehensive Income.

2
Because SOMA securities are recorded at amoritized cost, the change in the cumulative unrealized gains (losses) is not reported in the Statements of Income
and Comprehensive Income.
1

The amount of change in cumulative unrealized gains (losses) position, net, related to foreign currency denominated investments was a gain of $18 million and a loss of $90 million for the years ended December 31, 2014 and 2013, respectively, of
which $1 million and $7 million, respectively, were allocated to the Bank.
Accounting Standards Codification (ASC) Topic 820 (ASC 820) defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820
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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

establishes a three-level fair value hierarchy that distinguishes between assumptions developed using market data obtained
from independent sources (observable inputs) and the Bank’s assumptions developed using the best information available in
the circumstances (unobservable inputs). The three levels established by ASC 820 are described as follows:
•
•

•

Level 1 – Valuation is based on quoted prices for identical instruments traded in active markets.
Level 2 – Valuation is based on quoted prices for similar instruments in active markets, quoted prices for identical or
similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuation is based on model-based techniques that use significant inputs and assumptions not observable in the
market. These unobservable inputs and assumptions reflect the Bank’s estimates of inputs and assumptions that market
participants would use in pricing the assets and liabilities. Valuation techniques include the use of option pricing models,
discounted cash flow models, and similar techniques.

Treasury securities, GSE debt securities, federal agency and GSE MBS, and foreign government debt instruments are classified
as Level 2 within the ASC 820 hierarchy because the fair values are based on indicative quotes and other observable inputs
obtained from independent pricing services. The fair value hierarchy level of SOMA financial assets is not necessarily an indication of the risk associated with those assets.

6. BANK PREMISES, EQUIPMENT, AND SOFTWARE
Bank premises and equipment at December 31 were as follows (in millions):
2014
Bank premises and equipment:
Land and land improvements
Buildings
Building machinery and equipment
Construction in progress
Furniture and equipment

Subtotal

Accumulated depreciation

Bank premises and equipment, net

Depreciation expense, for the years ended December 31

2013

8
119
28
1
50

8
113
25
1
53

206

200

(116)

(113)

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The Bank leases space to outside tenants with remaining lease terms ranging from 3 to 10 years. Rental income from such
leases was $2 million for each of the years ended December 31, 2014 and 2013, and is reported as a component of “Noninterest loss: Other” in the Statements of Income and Comprehensive Income. Future minimum lease payments that the Bank
will receive under noncancelable lease agreements in existence at December 31, 2014, are as follows (in millions):
2015
2016
2017
2018
2019
Thereafter
Total

2
2
2
2
3
4

The Bank had capitalized software assets, net of amortization, of $7 million and $6 million at December 31, 2014 and 2013,
respectively. Amortization expense was $2 million for each of the years ended December 31, 2014 and 2013. Capitalized
software assets are reported as a component of “Other assets” in the Statements of Condition and the related amortization is
reported as a component of “Operating expenses: Other” in the Statements of Income and Comprehensive Income.

7. COMMITMENTS AND CONTINGENCIES
In conducting its operations, the Bank enters into contractual commitments, normally with fixed expiration dates or termination provisions, at specific rates and for specific purposes.
At December 31, 2014, the Bank was obligated under noncancelable leases for premises and equipment with remaining terms
ranging from 1 to approximately 5 years. These leases provide for increased lease payments based upon increases in real
estate taxes, operating costs, or selected price indexes.
Rental expense under operating leases for certain operating facilities, warehouses, and data processing and office equipment
(including taxes, insurance, and maintenance when included in rent), net of sublease rentals, was $1 million for each of the
years ended December 31, 2014 and 2013. Certain of the Bank’s leases have options to renew. The Bank has no capital leases.
Future minimum lease payments under noncancelable operating leases, net of sublease rentals, with remaining terms of one
year or more, at December 31, 2014, are as follows (in thousands):
Operating leases
2015
2016
2017
2018
2019

457
468
480
492
41

Future minimum lease payments

1,938

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

At December 31, 2014, there were no material unrecorded unconditional purchase commitments or obligations in excess of
one year.
Under the Insurance Agreement of the Reserve Banks, each of the Reserve Banks has agreed to bear, on a per-incident basis, a
share of certain losses in excess of one percent of the capital paid-in of the claiming Reserve Bank, up to 50 percent of the total
capital paid-in of all Reserve Banks. Losses are borne in the ratio of a Reserve Bank’s capital paid-in to the total capital paid-in
of all Reserve Banks at the beginning of the calendar year in which the loss is shared. No claims were outstanding under the
agreement at December 31, 2014 and 2013.
The Bank is involved in certain legal actions and claims arising in the ordinary course of business. Although it is difficult to
predict the ultimate outcome of these actions, in management’s opinion, based on discussions with counsel, the legal actions
and claims will be resolved without material adverse effect on the financial position or results of operations of the Bank.

8. RETIREMENT AND THRIFT PLANS
Retirement Plans
The Bank currently offers three defined benefit retirement plans to its employees, based on length of service and level of
compensation. Substantially all of the employees of the Reserve Banks, Board of Governors, and Office of Employee Benefits
of the Federal Reserve System participate in the Retirement Plan for Employees of the Federal Reserve System (System Plan).
Under the Dodd-Frank Act, newly hired Bureau employees are eligible to participate in the System Plan. In addition, employees at certain compensation levels participate in the Benefit Equalization Retirement Plan (BEP) and certain Reserve Bank
officers participate in the Supplemental Retirement Plan for Select Officers of the Federal Reserve Banks (SERP).
The FRBNY, on behalf of the System, recognizes the net asset or net liability and costs associated with the System Plan in its
consolidated financial statements. During the years ended December 31, 2014 and 2013, certain costs associated with the
System Plan were reimbursed by the Bureau.
The Bank’s projected benefit obligation, funded status, and net pension expenses for the BEP and the SERP at December 31,
2014 and 2013, and for the years then ended, were not material.
Thrift Plan
Employees of the Bank participate in the defined contribution Thrift Plan for Employees of the Federal Reserve System (Thrift
Plan). The Bank matches 100 percent of the first six percent of employee contributions from the date of hire and provides
an automatic employer contribution of one percent of eligible pay. The Bank’s Thrift Plan contributions totaled $5 million for
each of the years ended December 31, 2014 and 2013 and are reported as a component of “Operating expenses: Salaries and
benefits” in the Statements of Income and Comprehensive Income.

9. POSTRETIREMENT BENEFITS OTHER THAN RETIREMENT PLANS AND POSTEMPLOYMENT
BENEFITS
Postretirement Benefits Other Than Retirement Plans
In addition to the Bank’s retirement plans, employees who have met certain age and length-of-service requirements are eligible for both medical and life insurance benefits during retirement.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

The Bank funds benefits payable under the medical and life insurance plans as due and, accordingly, has no plan assets.
Following is a reconciliation of the beginning and ending balances of the benefit obligation (in millions):
2014

2013

Accumulated postretirement benefit obligation at January 1
Service cost benefits earned during the period
Interest cost on accumulated benefit obligation
Net actuarial loss (gain)
Curtailment loss
Contributions by plan participants
Benefits paid
Medicare Part D subsidies
Plan amendments

91.3
3.0
4.5
13.0
(0.9)
1.9
(6.6)
0.4
-

103.6
3.3
3.9
(16.3)
1.9
(5.9)
0.4
0.4

Accumulated postretirement benefit obligation at December 31

106.6

91.3

At December 31, 2014 and 2013, the weighted-average discount rate assumptions used in developing the postretirement
benefit obligation were 3.96 percent and 4.79 percent, respectively.
Discount rates reflect yields available on high-quality corporate bonds that would generate the cash flows necessary to pay
the plan’s benefits when due. The System Plan discount rate assumption setting convention uses an unrounded rate.
Following is a reconciliation of the beginning and ending balance of the plan assets, and the unfunded postretirement benefit
obligation and accrued postretirement benefit costs (in millions):
2014
Fair value of plan assets at January 1
Contributions by the employer
Contributions by plan participants
Benefits paid
Medicare Part D subsidies

Fair value of plan assets at December 31
$

Unfunded obligation and accrued postretirement benefit cost
$

Amounts included in accumulated other comprehensive loss are shown below:

Prior service cost
$
Net actuarial loss
Total accumulated other comprehensive loss

69
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

2013

4.3
1.9
(6.6)
0.4

3.6
1.9
(5.9)
0.4

106.6

91.3

(0.5)
(24.7)

(1.2)
(13.2)

(25.2)

(14.4)

NOTES TO FINANCIAL STATEMENTS

Accrued postretirement benefit costs are reported as a component of “Accrued benefit costs” in the Statements of Condition.
For measurement purposes, the assumed health-care cost trend rates at December 31 are as follows:
2014 2013
Health-care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(the ultimate trend rate)
Year that the rate reaches the ultimate trend rate

6.60 %

7.00 %

4.75 %
2019

5.00 %
2019

Assumed health-care cost trend rates have a significant effect on the amounts reported for health-care plans. A one percentage point change in assumed health-care cost trend rates would have the following effects for the year ended December 31,
2014 (in millions):
One percentage
One percentage
point increase
point decrease
Effect on aggregate of service and interest cost components
of net periodic postretirement benefit costs
Effect on accumulated postretirement benefit obligation

0.2
2.1

(0.8)
(9.6)

The following is a summary of the components of net periodic postretirement benefit expense for the years ended December
31 (in millions):
2014
2013
Service cost-benefits earned during the period
Interest cost on accumulated benefit obligation
Amortization of prior service cost
Amortization of net actuarial loss

Total periodic expense
Curtailment
Net periodic postretirement benefit expense

3.0
4.5
0.6
0.7

3.3
3.9
0.4
2.9

8.8

10.5

0.1

8.9

10.5

Estimated amounts that will be amortized from accumulated other comprehensive loss into net periodic postretirement benefit expense in 2015 are shown below:
Prior service cost
Net actuarial loss
Total

0.1
2.0

2.1

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

Net postretirement benefit costs are actuarially determined using a January 1 measurement date. At January 1, 2014 and
2013, the weighted-average discount rate assumptions used to determine net periodic postretirement benefit costs were 4.79
percent and 3.75 percent, respectively.
Net periodic postretirement benefit expense is reported as a component of “Operating expenses: Salaries and benefits” in
the Statements of Income and Comprehensive Income. A curtailment loss associated with restructuring programs that are
described in Note 11 was recognized in net income in the year ended December 31, 2014.
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 established a prescription drug benefit under
Medicare (Medicare Part D) and a federal subsidy to sponsors of retiree health-care benefit plans that provide benefits that
are at least actuarially equivalent to Medicare Part D. The benefits provided under the Bank’s plan to certain participants
are at least actuarially equivalent to the Medicare Part D prescription drug benefit. The estimated effects of the subsidy are
reflected in actuarial loss in the accumulated postretirement benefit obligation and net periodic postretirement benefit expense.
Federal Medicare Part D subsidy receipts were $408 thousand and $331 thousand in the years ended December 31, 2014 and
2013, respectively. Expected receipts in 2015, related to benefits paid in the years ended December 31, 2014 and 2013, are
$195 thousand.
Following is a summary of expected postretirement benefit payments (in millions):
Without subsidy
2015
2016
2017
2018
2019
2020 - 2024

Total

With subsidy

5.1
5.4
5.7
5.9
6.2
33.3

4.8
5.0
5.2
5.4
5.6
30.1

61.6

56.1

Postemployment Benefits
The Bank offers benefits to former or inactive employees. Postemployment benefit costs are actuarially determined using a
December 31 measurement date and include the cost of providing disability; medical, dental, and vision insurance; and survivor income benefits. The accrued postemployment benefit costs recognized by the Bank at December 31, 2014 and 2013,
were $6.7 million and $7.2 million, respectively. This cost is included as a component of “Accrued benefit costs” in the Statements of Condition. Net periodic postemployment benefit expense (credit) included in 2014 and 2013 operating expenses
were $0.3 million and $1.6 million, respectively, and are recorded as a component of “Operating expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

71
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

10. Accumulated Other Comprehensive Income And Other Comprehensive Income
Following is a reconciliation of beginning and ending balances of accumulated other comprehensive income (loss) as of December 31 (in millions):
2014
2013
Amount related to Amount related to
postretirement
postretirement
benefits other than benefits other than
retirement plans
retirement plans
Balance at January 1
Change in funded status of benefit plans:
Prior service costs arising during the year
Amortization of prior service cost

(14.4)
0.1
0.6

(33.5)
(0.4)
0.4

1
2

Change in prior service costs related to benefit plans
Net actuarial (loss) gain arising during the year
Amortization of net actuarial loss

0.7
(12.2)
0.7

Change in actuarial (losses) gains related to benefit plans

(11.5)

19.1

Change in funded status of benefit plans - other comprehensive (loss) income

(10.8)

19.1

Balance at December 31

(25.2)

16.2
2.9

3
2

(14.4)

Net curtailment loss due to acceleration of prior service cost related to business restructuring. See Note 11 for further information.

Reclassification is reported as a component of “Operating Expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.

Includes an actuarial gain on curtailment of $0.8 million related to business restructuring. See Note 11 for further information.

Additional detail regarding the classification of accumulated other comprehensive loss is included in Note 9.

11. Business Restructuring Charges
In 2014, the Treasury announced a plan to consolidate the number of Reserve Banks providing fiscal agent services to the
Treasury from ten to four. As a result of this initiative, the Government Entity Accounting and Reporting System and Treasury
Collateral Management and Monitoring operations performed by the Bank will be transitioned to the Federal Reserve Bank
of St. Louis in 2015. Additionally, the Post Payment System and Treasury Software Quality Assurance operations performed
by the Bank will transition in phases to the Federal Reserve Bank of Kansas City over the next several years. The Bank had no
material business restructuring charges in 2013.
In years prior to 2013, the Reserve Banks announced the acceleration of their check restructuring initiatives to align the check
processing infrastructure and operations with declining check processing volumes. The new infrastructure consolidated paper and electronic check processing at the FRBA.

72
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

Following is a summary of financial information related to the restructuring plans (in millions):
2014
restructuring plans
Information related to restructuring plans as of December 31, 2014:
Total expected costs related to restructuring activity
$
2.9
Expected completion date
June 2014

Reconciliation of liability balances:
Balance at December 31, 2013
$
Employee separation costs
2.1
Adjustments
0.8
Balance at December 31, 2014

2.9

Employee separation costs are primarily severance costs for identified staff reductions associated with the announced restructuring plans. Separation costs that are provided under terms of ongoing benefit arrangements are recorded based on
the accumulated benefit earned by the employee. Separation costs that are provided under the terms of one-time benefit
arrangements are generally measured based on the expected benefit as of the termination date and recorded ratably over
the period to termination. Restructuring costs related to employee separations are reported as a component of “Operating
expenses: Salaries and benefits” in the Statements of Income and Comprehensive Income.
Adjustments to the accrued liability are primarily due to changes in the estimated restructuring costs and are shown as a
component of the appropriate expense category in the Statements of Income and Comprehensive Income.
Costs associated with enhanced postretirement benefits are disclosed in Note 9.

12. DISTRIBUTION OF COMPREHENSIVE INCOME
In accordance with Board policy, Reserve Banks remit excess earnings, after providing for dividends and the amount necessary to equate surplus with capital paid-in, to the U.S. Treasury as earnings remittances to the Treasury. The following table
presents the distribution of the Bank’s comprehensive income in accordance with the Board’s policy for the years ended
December 31 (in millions):
2014

Dividends on capital stock
Transfer from surplus - amount required to equate surplus with capital paid-in
Earnings remittances to the Treasury
Total distribution

2013

118
(471)
2,625

127
(48)
2,189

2,272

2,268

During the year ended December 31, 2014, the Bank recorded a reduction in the amount of capital paid-in and a corresponding reduction of surplus, which is presented in the above table as “Transfer from surplus – amount required to equate surplus
73
FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

NOTES TO FINANCIAL STATEMENTS

with capital paid-in.” The reduction of surplus resulted in an equivalent increase in “Earnings remittances to the Treasury” and
a reduction in “Comprehensive income” for the year ended December 31, 2014.

13. SUBSEQUENT EVENTS
There were no subsequent events that require adjustments to or disclosures in the financial statements as of December 31,
2014. Subsequent events were evaluated through March 11, 2015, which is the date that the financial statements were available to be issued.

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FEDERAL RESERVE BANK OF PHILADELPHIA | ANNUAL REPORT 2014

Full text of Annual Report of the Federal Reserve Bank of Philadelphia : Reflections : 2014 Annual Report

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